Some good case studies in valuation ethics coming out of a longstanding scandal regarding the activities of RBS, their so-called turnaround unit (Global Restructuring Group) and a subsidiary called West Register during the financial crisis in 2008.
The sharp fall in values in the property market at the time meant that many borrowers were in default of LTV ratios with lenders being able to step in and repossess assets, force loan re-structuring etc.
I remember one friend who had a created a small property fund describing the kind of pressure that he was put under by his lender at the time – even though interest etc. was comfortably being paid and cash flow was healthy.
Newsnight have been running various pieces on the issue over the last few years. In last night’s story, the issue of valuation came up – in particular hotel valuation. One of the issues revolved around the valuation bases. I’m guessing here that one valuation was on a going concern basis and the other on a bricks and mortar basis. For one small hotel operator/developer
In February 2010, their hotel had been valued at £7.7m once it was up and running. But in June 2010 a new valuer, Knight Frank, was brought in and valued it on a different basis: £2.5-£3m to sell immediately without the extra work still needed. On that much lower valuation, Chris and his partner were in breach of their loan terms…
However, it appeared that the valuer was also involved in discussions with a potential purchaser – RBS’s own West Register! West Register seemed to have been in communication with Knight Frank. Prima facie, it looks like a mess of conflicts of interests – at best.
Ten days after his business had been transferred to the Global Restructuring Group in June 2010, an official from West Register joined a meeting with the independent valuer, Knight Frank, and the bank to discuss his business. Chris knew West Register had been in on discussions from earlier evidence. But the report went further, quoting minutes he had never seen showing the West Register official had talked down its value. Newsnight asked Paul Wolfenden, former global head of valuation at surveyors DTZ who regularly serves as an expert witness in similar cases, what he thought a valuer should do when a potential purchaser seeks to influence a valuation.
“Ideally he shouldn’t have joined the call in the first place because if he knew the purchaser was going to be on the call, he should not have joined the call. Once he knew the purchaser was on the call, he should have either refused to answer questions or rung off,” Mr Wolfenden said.
The Knight Frank response was delicious. They claimed to have produced a valuation figure which was “wholly accurate”. Wow! That’s a bold claim to make for a partially complete hotel which, imho, would be extremely challenging to value. A good analogy of what had gone on was provided
Imagine your mortgage lender tells you the value of your house has dropped and it is now worth less than your loan. The bank wants its money back and within weeks you lose control of your house. Then imagine how you would feel if you found out, much later, that the lender had a property division that was interested in buying your house – and that, without your knowledge at the time, it had been talking down its value. Now imagine one more thing: that property division ended up buying your house.
Also, imagine that the so-called independent valuer was talking to buyer about the value of your house. Paul Wolfenden commented that
“I think it’s just fundamentally inappropriate. Because why would the bank condone a purchaser being on the line talking values down when the bank ought to be motivated to get the highest possible price a) to redeem as much of their loan as possible and b) to reduce the loss to the borrower?”
Buzzfeed also highlight a case of a repossession of an independent school with Knight Frank making another appearance.
In January, the unit produced an informal valuation (obtained from Knight Frank) claiming the school was worth between £500,000 and £600,000 – around half the value it had been given a month earlier. Boyington was angry: “They’d rejected a legitimate valuation for something written on the back of a fag-packet.”
What happened next is a common thread in the stories of hundreds of businesses that were swept into GRG. The unit’s property division, West Register, swooped in and offered to buy the school at the reduced price recommended by its own valuation. The RBS Files reveal that West Register was “used by GRG to acquire property assets from distressed situations” and sought “to exit properties via a future commercial sale in order to extract maximum economic value”. They also show that the bank’s auditors had raised concerns about GRG’s tendency to “over-ride or ignore third party information (such as third party valuations)”.
I do find that the media can get a lot of these things twisted in real estate stories – but there’s good case study material somewhere here for a valuation ethics tutorial. I’m struggling to see how Knight Frank could be truly independent here. RBS (Westfield???) would have been a huge client at the time that they could not afford to lose. Albeit there’s a risk of reputational damage.