Mountain Retreat is the perfect place for conceptual thinking!

??What happens when rating agencies take the lead in the appraisal of properties?

??Banks' purpose is to take in deposits and leverage this equity to make a profit by lending money. During the supercycle, with almost no cost of money, margins have been low, while market risks have also been considered nearly electable.

??Since times have changed and big players like SIGNA have dropped out, the EZB is doing everything to reinstall orders.

??As a result, rating agencies stress-test the properties' valuation, leading to value corrections.??In July, two very prominent properties made it into the press.

???S&P. has re-evaluated the Squaire in Frankfurt. While the property was taken over in 2019 by AGC Equity Partners for 1 Billion EUR, today, its value is estimated at 520 Million EUR. The Squaire was built between 2006 and 2011 on top of a train station next to Frankfurt Airport. The building is 660 m long, 65 m wide, 45 m high, and has nine floors. With a total floor area of 140,000 m2, it is the largest office building in Germany.

??Trianon, another flagship in the Frankfurt skyline, was traded for 670 Million EUR in 2018. Today, its value is estimated at approximately 300 Million EUR. The 45-storey, 186-meter-high skyscraper with 68.000 sqm was completed in 1993. Since Deka moved out and vacated 20.000 sqm, the SPV, which owns the property, applied for insolvency.

Officially, the main reason for the value correction is the vacancy of the Offices. However, today's vacancy is only between 20 % and 30 %, and in the case of the Squaire, there are plenty of other sources of cash flow than Offices, like the very successful hotels and retailers.

Hence, there must be something else that brings the values down! It's called the 'unlikely risk to pay', a term that describes the potential risk of default that is only apparent after some time. This risk is a significant factor in property valuation.

???To calculate this risk, the appraiser must count on market volatility and the risk of default, which includes ESG Qualities (green capex analysis), the stability of the cash flow (in this case, the ability of the property to attract new tenants), and, of course, the general outlook for the Office market.

1???The Discounted Cash Flow (DCF) Analysis, a vital tool in property valuation, considers the future cash flows available for loan repayments and discounts as fully accountable incentives. These incentives can include fit-out contributions, rent-free time and other financial factors that affect the property's value over time.

2??The Credit Risk Assessment Evaluates not only the borrower's ability to repay the loan but also the tenant's ability to fulfil their lease obligations.

3??The market value adjustment must consider additional factors, such as changes in property market conditions, economic factors, and real estate trends.

4??Finally, risk-based Pricing considers the loan-to-value ratio and reflects the loan structure's interest rates and necessary risk-assessed margin.

??The super cycle has passed, yet some still hope for cheaper money instead of accepting the challenge and stabilizing cash flow through operational excellence and introducing ESG measures.

??ESG reporting should be considered for the benefit of shareholders, regulation, tenants, and banks equally.

??Disclosing and demonstrating continuous improvement and progress for the benefit of stakeholders is essential for the long-term success and stability of cash flow!

??The industry needs to improve with operational excellence. The last poll from #workcloud24 reveals that only 17% believe in the power of ESG Reports to support leasing activities, and 0% believe in the power of ESG reports for banks.

???The truth is that any property with a valid ESG reporting structure towards tenants and occupiers is gaining market shares while others are significantly losing value. McKinsey says it will be 40% in the next five years.

??The better quality the ESG reports to the banks are, the higher the probability of getting a loan with a better margin and higher loan-to-value ratio.

??The more transparent ESG reports to tenants are, the better the engagement rate and, hence, the higher the conversion rate for extending leases.

? On the other hand, ESG reporting for regulatory purposes doesn't create value; it only reflects legal risk and helps identify stranded asset infliction.

???To summarize;

?The days of creating value, when yield compression supported a buy, hold, and sell strategy, are gone.

??Today's market requires proactive real estate management and operational excellence, emphasizing the urgency and importance of these practices in our industry can and should be done with ESG Reporting.