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Cape Town - There is often a serious disconnect between what a property owner thinks their property is worth and how it will be valued by lenders.
Gary Palmer, CEO of independent lender Paragon Lending Solutions, says understanding the difference can save time and frustration when looking to raise capital against properties.
Palmer says the current economic climate is exacerbating the skewed perception of property valuations. The uncertainty around interest rates, a zero growth rate and consumer pressures are taking their toll. These pressures are also shifting the supply in the property market, as skittish investors look for ways to become more liquid and move their money offshore.
Banks are seeing evidence of this distress in their books. As a result, valuers working for the traditional financial institutions are becoming more cautious, says Palmer.
This is often at direct odds with property owners who have an overinflated view of what their property is worth.
"Property valuers who work with us have confirmed this. They believe that at least 50% of the time clients think their properties are worth way more than what is considered market related. Sales stats also back this up with price variances - between asking price and selling price - generally between 40% and 50%.
Another exacerbating factor creeps in when properties are run as businesses. Specific purposes such as student accommodation or short-term office rentals, storage or short-term industrial rentals, and even AirBnB businesses, can inflate the value in the mind of the owner.
The same applies to student accommodation, where the business operation delivers far more return than what it would if it were to be sold for traditional occupancy.
People have been getting creative with their properties to maximize return.
AirBnB is a good example of this. Owners may be leasing out their R2m property at R1 500 per day. By their calculations this would value the property at R3.5m as a going concern. The property valuations wouldn’t come anywhere near that as the valuer would assume a vacant property and not a short-term enterprise.
Things are no different when it comes to commercial property. Although many commercial property owners have solid long-term leases in place, these may be slightly higher than the market related prices in the area. Again, this will result in a lower than expected valuation.
Similarly, municipal valuations are not realistic benchmarks. These are based purely on the size of erf, the size of the structure, and the median sale price in the area.
"It’s important for people looking to raise finance against their property to have a realistic idea of their property’s market value. While it may have all the potential to derive great returns as a going concern, lenders will look at the reality should they default on a loan – and this is always based on a valuation," says Palmer.
"Understanding that external market forces will come into play ensures you can realistically plan and budget for your future."
For some firms, being awarded an instruction to value a property or portfolio of real estate assets is often not given sufficient regard, says TC Chetty, country manager for South Africa for the Royal Institution of Chartered Surveyors (RICS).
“While new business is always welcome, new business is not necessarily ‘good’ business if insufficient attention is paid to actual qualification and competence, and this puts any valuer in a potentially risky situation.
“When cash flow is tight, there may be pressure to accept any valuation instruction, which may lead to firms accepting instructions where they are unable to demonstrate detailed sector knowledge or where they don’t have the correct specialist skills.”
In South Africa, all practicing valuers must be registered with the South African Council for the Property Valuers Profession.
Graham Stockey, principal assurance surveyor, Regulation for RICS, explains further: “This includes a range of scenarios such as practitioners from a non-valuation discipline carrying out valuation instructions without the necessary training or experience, a valuer accepting instructions in a country or location where they do not possess the required detailed knowledge of the local market, or where a valuer who only has experience of valuing residential property is asked to provide a valuation report on a huge property portfolio which spans many locations and includes hotels and commercial and industrial property.
“If you were a client in the latter instance, you would not be happy to know that your valuer didn’t have much experience on mixed use and commercial property.”
Stockey says when undertaking a valuation the Terms of Engagement document between client and valuer is the most important in a case file. This document details the responsibilities and the scope of work required.
Stockey also points out that a conflict of interest may arise and is anything that impedes or might be perceived to impede an individual's or firm's ability to act impartially and in the best interest of a client. A conflict of interest can cast doubt on a valuer’s integrity and can also have a damaging effect on his or her firm and the profession as a whole.
“Valuers must make a file note of all checks carried out into previous involvement with any aspect of the valuation instruction, including all parties to the property transaction, the property itself and any cross-discipline connection they may have with parties involved in the transaction.”
“Equally, if not more important for a valuer is to maintain a record of any discussions, e-mails, or letters relating to the management of any potential conflict of interest. Otherwise, how can you later prove you informed your client if that person chooses to challenge you?” concludes Stockey.
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