Nick Wilson

THE property valuation industry has not kept pace with the tremendous growth in prices and rentals in the commercial property market.

Professional property valuers often rely on statistical information that is six months old and this can create problems for banks, the listed property sector and other players who use them.
Barry Kagansan, MD of valuation group Valuation Alliance, says banks in particular have the potential to lose out on lucrative property deals because of outdated valuation information.

Often the valuations done are too conservative — because of the time lag — and banks may decline to finance a property deal because they think the property’s value is too low.

Should the information used in the valuation be more current, the bank may actually decide the deal is viable.

“The biggest problem in the valuation industry is the pace at which the commercial property market is moving in terms of yields declining in certain areas, in terms of rental increases, and also the pace at which certain areas are improving and becoming more desirable.

“Valuers need to have hands-on market knowledge as to what is going on,” Kagansan says.

He says it is difficult to glean this information about commercial property from the available statistical data, which valuers generally use in conjunction with speaking to brokers.

He says information for the residential property market is more up to date because the information comes from the Deeds Office.

“You can also open up the weekend newspaper and see what properties are marketed at. That obviously doesn’t say what they are selling at, but it does give you an idea. “

The commercial property market, on the other hand, is not “completely transparent”, with valuers and the public having to rely largely on statistical information from economists’ reports.

“The data often lag six months behind what is actually happening in the market on the ground.”Kagansan says the time lag is caused by the need for the data to be submitted in all studies by researchers, as well as analysed, collated, printed and distributed.

As far as the listed property sector is concerned, valuations that are too conservative create a situation where the companies’ net asset value is actually below its market capitalisation.

Kagansan says there is a shortage of valuers in SA so it is difficult for banks to gain access to top quality valuers.

There are large firms overseas with 300 to 400 valuers who are specialists in specific geographic areas. But he says valuations are becoming more important and that the profile of the industry has been raised in SA.

“We are seeing a lot of professionals from other property sectors entering the valuation market such as quantity surveyors and architects, as well as people from outside the property industry such as accountants.”

Kagansan says Valuation Alliance relies on statistical information from its sister company, auction group Auction Alliance.

“We have access to detailed information on every property that gets auctioned, which is well over a 1000 properties a year all over the country. When we are looking at a comparable sale, for example in Pretoria, we can pull up our database on what properties sold for in the area.

“The valuer can then see what the tenancy profile is on the property, lease agreements, the expense profile of the property and, most importantly, what the property sold for. He can then go and see the property and see how it compares to the subject property he is valuing.”

Kagansan says this enables the valuer to make an informed decision on the value of a specific property.

Stewart Shaw-Taylor, MD of property finance and advisory services at Standard Bank, says that a valuation is “someone’s expert opinion at a given point in time based primarily on historic information”.

“In our experience we see a wide range of valuations. In other words, you can get different valuations from different valuers.

“That is of concern to us in that we would like more uniformity and standardisation.”

He says when Standard Bank is approached for a property deal it will obtain a professional valuation but then evaluate the valuation for the bank’s own financing requirements.

This essentially means taking a view on the valuation “looking forward, bearing in mind that a valuation is somebody’s expert opinion at a given point in time based on historic information”.

Shaw-Taylor says the bank does not accept valuations on face value. He says there is substantial room for improvement in the valuation industry in order to obtain more uniformity and standard in valuations.

Andre Stadler, MD of Catalyst Fund Managers, says he understands the difficulty of the valuation process in “attempting to value a specific property at a specific point in time where there is limited potential market information available”.

“Each asset is unique and the actual volumes of transactions may be limited. An example would be an asset like Canal Walk or a Sandton City. It is difficult to have comparable evidence because they very seldom trade.”

Stadler says in these cases it is necessary to then refer to “other frames of reference in order to get a valuation”.

“The question is to what extent valuers should be taking cognisance of the yields and pricing of the listed property sector into account in determining their valuations, given that the listed property sector trades in excess of R2bn a month, providing some market evidence of yield and investor pricing of the asset class,” says Stadler.

He says a key issue is that a valuation on a property is one valuer’s view of one property at a specific point in time and that this has limitations in terms of its application from a listed property perspective. “So we would expect the listed property sector to trade at both premiums or discounts to net asset value at different points in time over a 12-month period.”