Property valuers and loan servicers may be too cautious when reviewing the European commercial property markets and the approach may encourage excessive conservatism to be built into valuations and work-out strategies, said Fitch Ratings.
Given the continued inactivity in European commercial property markets, Fitch is concerned that the more conservative valuations could impact the credit profile of European CMBS by encouraging special servicers to dispose of properties at depressed prices when resolving distressed loans.
In order to negotiate the often-conflicting demands placed on them from across a range of constituencies, special servicers have to determine an appropriate workout strategy for each defaulted loan. To help with this, servicers will typically call upon the expertise of valuers.
Despite being trained to a single standard and with access to the same information, differences of opinion are not uncommon among valuers. Receiving an external valuation that it considers should be readily attainable under prevailing market conditions might prompt the special servicer to dispose of the mortgaged property - even if this meant achieving a price it would otherwise have rejected.
This, said Fitch, would be especially compelling for properties experiencing income volatility.
"Servicers reacting to valuations selectively, with disposal activity biased towards cautious appraisals, could make conservative views self-fulfilling, thus adversely impacting the credit profile of related CMBS," explained Fitch analysts. "Not only might properties with lower income visibility be marketed more frequently, but potential buyers would be reluctant to bid above the revised value."
Fitch said that assessing how revaluations should influence its rating analysis presents a challenge becasue it is difficult to judge when such factors could be at play.
