Valuers approach to the COVID-19 property market?
Valuers are required to report at a specific date and reflect market conditions at that time. Events such as COVID-19 create valuation uncertainty, because the only inputs and metrics available for the valuation are likely to relate to the market before the event occurred and the impact of the event on prices will not be known until the market has stabilized.
Currently, there is no way of confirming the movement through transaction data as yet and valuers will need to rely on all information available to them when they complete and submit their market value assessments. Valuers can reflect, for example, historical evidence that suggests how property markets might move under differing economic conditions.
Expect valuers completing valuations during the COVID-19 crisis to:
- caveat their advice, referencing some of the issues outlined above
- reference the high valuation uncertainty, and that there is more downside than upside value estimation error.
- reserve the right to reconsider their advice as events unfold and if these events are likely to have a material impact on value. This might extend to valuers recommending that they review their advice prior to the next financial reporting date and as market evidence occurs.
- More regular valuation reporting will likely be needed to keep advice up to date.
Valuers will have to estimate the appropriate discount and/or capitalisation rate to apply for their analysis. When markets are stressed, valuers will need to consider issues such as the need for liquidity premiums and whether it is appropriate to consider additional risk premiums to account for the greater degree of uncertainty in estimating cash flows. Care will need to be taken in deciding on the appropriate level of additional risk and significant judgement will be required. We would recommend that the reasoning for any additional is documented within valuation reports to provide transparency.
Australian Valuers Institute have provided a scope to its valuers, which suggests that its members consider advising their clients that they:
“… attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.â€; and report their valuations “on the basis of ‘material valuation uncertainty’. Consequently, less certainty – and a higher degree of caution – should be attached to [our] valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review.â€
Notwithstanding the above, valuers will need to advance their thinking on how they structure their valuation reports to ensure they communicate their opinions and assumptions in a way that assists their clients with evaluating the valuation advice and presenting it in a meaningful way to their stakeholders.
Considering the likely impacts on the major assumptions of value, we suggest a softening of capitalisation rates is likely to occur across most asset classes.
We see ‘value add’ properties climbing higher up the risk curve with an emphasis placed on well leased property to secure tenants with fixed growth, such as prime assets, where capital will continue to seek diverse and secure cashflows. Australia has traditionally been favoured for its transparent market and strong governance and will likely continue to attract offshore capital.
Valuers will include new disclaimers and utilise evidence available to them at the time and should ensure to articulate fully their assumptions and opinions. Valuers should be open to having transparent dialogues with clients and their auditors as this crisis evolves. Their advice may require more regular updating, noting as more transactions occur throughout the crisis these will reveal how the market is responding.