Enhancing Decision Making
When undertaking a valuation, particularly on behalf of lending institutions, valuers carefully consider the risk profile of the property. Generally, these risks fall into two categories ‘Property Risk Factors’ and ‘Market Risk Factors’. In this edition, our focus is on ‘Property Risk Factors’, delving into various aspects that valuers evaluate for varying asset types.
Essentially, the risks identified within a valuation are considered adverse issues relating to the subject property, or its immediate locality. The valuer will alert the lender to the issue for further investigation, which assists the lender during the credit decision process.
Let’s explore some of the various property attributes considered by the valuer during the valuation process.
Title/Tenure Evaluation
One critical element in the valuation process involves scrutinising the title and tenure of the property. The valuer considers the title’s status, identifying issues like unregistered lots in new estates. Additionally, the tenure of the title is an important factor, leasehold title forms a less desirable lending prospect than freehold title generally.
The valuer also considers legal aspects that may relate to the property, including potential encumbrances like easements for services, right of way access, covenants, and encroachment issues. Encroachment specifically refers to instances where improvements on the subject property or adjoining properties infringe upon legal title boundaries by being built too close.
Land/Site Characteristics Assessment
Valuers delve into the intricacies of land characteristics, examining factors that go beyond a buyer's considerations. Accessibility is pivotal, with the valuer evaluating if the property has convenient road access. Is the access road sealed and available to access the property in all weather? If the access to the property has physical limitations, likely this will have an impact on value and may affect the marketability of the property, giving it a narrow market appeal. Not every buyer wants a property that is only accessible by 4wd.
The shape and topography of the land also play a role in determining potential development restrictions. A steeply sloping site for example will warrant a building with a higher build cost due to the accessibility issues and structural requirements for construction.
Zoning Considerations
Data is readily available to the valuer outlining any zoning requirements and overlays (eg: heritage, future acquisition, environmental, land management etc), these overlays are placed on the land by local and state government authorities. It's imperative for the valuer to assess and provide insightful commentary on the impact of any overlays present on the property.
Location Risk Factors
Location risk factors are based on the surrounding area. Whilst there can be a market stigma in some areas due to environmental or social concerns, there are other risk factors that more often cause concern.
The proximity of the subject to services that would be expected for that asset is a consideration for the valuer. For residential properties this includes schools, shops, public transport. For Commercial assets it includes proximity to major roads, potentially proximity to neighbouring residential estates. For agricultural properties, proximity to major towns, relevant commodity markets and facilities to support the practical use of the property are considerations.
The surrounding development plays a factor in the assessment. Surrounding development needs to ‘support’ the use of the property. A residential dwelling adjoining a commercial manufacturing facility would pose a higher risk than a residential dwelling surrounded by other residential uses for example.
Environmental Analysis
Valuers assess environmental risks disclosed by governmental sources and those observed during property inspections. Factors such as noise, flooding, erosion, landslip, bushfire hazard, proximity to transmission lines, contamination, proximity to polluting and offensive land uses are taken into account.
The effects of climate change are becoming increasingly evident, and the valuation industry continues to evolve in response to emerging threats. Coastal erosion and the effect of severe weather impacts are examples of these environmental risk factors more commonly occurring than they once were.
Evaluation of Improvements
A significant portion of property valuation involves assessing improvements and built structures. During a physical property inspection, the valuer notes the size, quality, and condition of the improvements. The functionality is assessed in relation to the use of the property. Any proposed or existing improvements are checked to ensure they comply with regulations, any compliance issues or defects are noted in the valuation report. Defects can often be costly to rectify, and any prospective lender needs to be made aware of the issues that may arise should they take possession of the property and are required to rectify these issues prior to disposal of the asset.
Being such a significant portion of the value of the asset, any threats to the improvements should also be noted by the valuer. Evidence of termite activity, asbestos materials and water penetration or mould issues should be alerted to the client to ensure measures are put in place to prevent damage and threats to health and safety of the occupants.
Next Edition: Unravelling Market Risk Factors
Valuation comprises more than an assessment of value, and there are many variables that a valuer must consider when completing a valuation report. ‘Property Risk Factors’ only form a portion of the considerations a valuer must have regard to when they are completing their assessment. Stay tuned for our next edition, where we will explore the ‘Market Risk Factors’ that valuers consider when undertaking a valuation.
For all your valuation needs across Australia, our extensive team at Acumentis is ready to offer decision certainty. Reach out to your local Acumentis team for expert assistance and information tailored to your valuation requirements.