Want to read Part 1 first? Read it here.
When undertaking a valuation, particularly on behalf of a lending institution, a valuer carefully considers the risk profile of the property.
Generally, these risks can be broken down into two categories ‘Property Risk Factors’ and ‘Market Risk Factors’. Last month, we looked at ‘Property Risks’. This month, our focus shifts to exploring the ‘Market Risk Factors’ for varying asset types.
Most valuation reports are completed on the basis of Market Value. Market Value, as defined the International Valuation Standards, represents:
“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
Analysing Market Transactions
To determine the ‘market’ a valuer must analyse recent comparable transactions within that market. In doing so, the valuer will gain an understanding of the nuances within that specific market and have consideration for the various factors at play, adjusting for the subject property. These adjustments determine where the subject sits within the market, based on the hypothetical situation outlined in the definition of market value. The risk factors identified within the valuation report correlate with the adjustments made and the environment in which a hypothetical transaction would take place.
Marketability and Leasing Potential
As a part of any valuation report the valuer should include commentary on the marketability of the subject property, together with an overview of the specific market segment. Consideration and commentary also need to be included on not only the saleability of the property, but what the subject offers as a leased premises, similar to when a property is sold, comparison is made to other properties available for lease, their characteristics are weighted against other available property in the locality/market segment.
Complex Securities
More complex securities such as commercial developments will require commentary not only on the subject on an ‘as is’ basis, but on the basis of final completion. For example, a development site where the valuer provides commentary on the market of the subject in its current condition, also outlining the potential for the final product given market conditions and evidence at the date of valuation. The valuer may make recommendations in this case to prevent an over-supply on the market, that the project be marketed on a staged basis.
Local and Regional Dynamics
Beyond the market segment in which this property sits, the local and regional economy is also a consideration for the valuer. Locations heavily dependent on a single industry or with significant seasonal fluctuations are at greater risk than locations with a broad range of trades and employers. This applies across all market segments being Residential, Commercial and Agribusiness.
Macro-Economic Considerations
Commentary surrounding the macro-economic conditions at the valuation date assists in understanding the economic climate, which will have an effect on the subject market. These broad market comments also assist readers in retrospective valuations, providing context for past economic circumstances as it’s often difficult to think back to a period in time to consider what was occurring at that specific time.
Identifying Specific Risks
Lenders often require specific risks to be triggered under certain circumstances. The conditions being experienced within this specific market segment at the date of valuation is one element of market risk that the valuer needs to consider.
- How long is the anticipated marketing period of the subject property?
- Is the property unique for this locality?
- Would it appeal to only a small sector of the market due to its unique features?
- Are there limited transactions in this location?
- If so, what are the reasons for this?
- Does the property appeal to a wide market or a more narrow market segment?
If the subject is under contract at the date of valuation, the valuer needs to have consideration for the contract price that has been negotiated. The valuer must consider and provide commentary on whether the sale is considered to be at market levels, if not, why not?
The level of market activity needs to be reviewed as part of the research that a valuer conducts, i.e is this market segment oversupplied? Is this type of property well sought after in a tightly held locality. These considerations need to be addressed by the valuer and an appropriate risk factor adopted depending on how adversely affected the subject is considered to be.
When analysing recent transactions occurring in the market, the valuer will gain an understanding of the sentiment. Considering the multitude of factors influencing market value, the valuer will be able to ascertain both current market conditions, and based on supply and demand they will indicate the direction that the market has taken over recent months.
Across various asset classes, valuers are skilled at the gathering and analysis of market evidence. The Acumentis team are dedicated to providing our clients with the most up to date market analysis, this translates to accuracy of valuations and high-quality reporting, leading to greater decision certainty.