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Commercial valuation needs to be standardised.

Posted On Wednesday, 04 June 2003 02:00 Published by eProp Commercial Property News
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Using different methodologies leads to distrust in the investment community.

Banus van der WaltCommercial property as an asset class has to compete with alternative investments such as equities and the bond market, and to sustain earnings and investor value investors need the assurance that the methodologies used to value a property are of "unquestionable quality".

 Sanlam's property asset management MD, Banus van der Walt, expressed this view at a valuation conference in Sandton last week hosted by Investment Property Databank SA.

 Van der Walt says the SA Property Information Exchange (Sapix) and the property data bank have made huge contributions to SA's property market in trying to standardise valuations among members. Property valuations are not exact and the fundamentals, so methodologies need to be above reproach.

 The interpretation of the market condition differs from valuer to valuer and there is a need for seasoned property practitioners and experienced valuers to serve the investor community, he says.

 By its nature, commercial property is a lower-turnover investment, with the market activity limited to a few buyers and sellers.

 Each property has unique attributes that influence its value. Globalisation has brought a new dimension to the market.

 Van der Walt says better valuations are needed because relatively low trading activity typifies SA's commercial property market, and in the absence of market values, an investor in property has to rely to a large extent on these value assessments.

 Using different methodologies for valuation with differing outcomes leads to distrust in the investment community, as fund and portfolio managers are not property experts, Van der Walt says.

 Historical valuations can be classified in three ways: actuarial, accounting and property valuer valuations.

 The actuarial category aims to balance assets with long-term liabilities, whereas the driving force in the accounting category is to balance the books and ensure that the value meets with accounting practices.

 "This (accounting category) was always a more conservative approach, although I must admit I have also seen some hugely inflated valuations to improve the balance sheet or to create value', especially where it was linked to performance bonuses."

 He says that while property valuers always have to value within certain prescribed norms, practices and principles, the different methodologies permit too much leeway, creating a situation where the valuer becomes "his master's voice".

 Investment Property Databank MD Stan Garrun says Sapix/IPD guidelines aim to put forward a "common and consistent principle by which valuations are conducted".

 "What we are doing without being prescriptive is trying to influence participants by bringing hard facts to their attention. We want to provide good research information to people doing valuations to assist them," he says.

 The March 2003 Sapix/IPD valuation guide says it is widely recognised in the directly held and listed property sectors that a consistent approach to valuation is needed to ensure a credible SA property index.

 The guide has been revised, following extensive consultation with Sapix and IPD participants and institutional and private valuers to improve the credibility, consistency and accuracy of valuation data submitted to the IPD.

 It says that participation in IPD SA requires each participant to follow valuation principles and standards set out in the guide.

 Where property is to be valued externally at least once every three years, it is recommended IPD participants regularly instruct and consult independent valuers. "Adherence to this recommendation will ensure unbiased and consistent reporting of valuations."

 The guide says discounted cash flow is the preferred method of valuation, recommending that it be adopted by all participants for year-end valuations.

 Discounted cash flow is the approach by which private, institutional, local and foreign investors are now analysing and investing in property, so it is appropriate that SA valuers and IPD participants adopt this method.

 It requires properties to be valued by discounting expected future net income for a specific period, usually at least five years, at an appropriate discount rate, to give the current value of the expected net income cash flow. To this figure, an applicable final discounted residual or revisionary value is added.

 Local property economist Francois Viruly of Viruly Consulting says: "Independent valuations are critical."

 He agrees with using discounted cash flow as the preferred method of valuation.

 "It takes cognisance of macroeconomic volatility in SA. I think it also takes into account the specific nature of property and, most importantly, the discounted cash flow reflects the valuation techniques used in other investment sectors for example, the valuation of a company," he says.


Last modified on Thursday, 22 May 2014 12:47

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