Dubai : A good dose of common sense could come in handy in setting an optimum value for a real estate asset, more so than ever in these uncertain times.
"The markets are moving very fast to rely on historic data and there's a huge gap between owners' and buyers' perceptions of value," said Luay Al Khatib, Special Adviser to the President of the UK's Royal Institution of Chartered Surveyors (RICS)K. "The issue we're facing right now is how to valuate in turbulent times."
This is especially true in Europe where the perception of a market value varies with the country.
The valuation profession is mainly about hard data used to arrive at an ultimate figure, but the methods used can lead to varying results. Fancy titles abound for such methods, including comparative, profit or build-cost, the reinstatement approach, investment worth and discounted cash flow techniques.
It really comes down to the purpose of an asset valuation. Valuation professionals in the UAE are concerned that their reports are later misused for a different purpose by their clients, inevitably distorting the actual picture.
"People need to be educated to understand what the valuation was done for," said Sophie Llewellyn, Vice-President Valuation and Investment, Majid Al Futtaim Properties.
To be on the safe side, the discounted cash flow technique allows for more accurate results for growth specific valuations as it takes into account future income potential. The more eventualities are taken into account, the more the final valuation figures can change, by up to 30 per cent or less.
"There's a distinct lack of transparency on market transactions and with that comparable evidence," said Philip Rist, a valuation professional at Colliers International. "It's hard to know which appropriate yield and discount rates to apply."
A property may also have been rented over — or under — the market price, which would need future discounts, cash flows and depreciation factors to be taken into account.
According to Sophie, it's best always to verify figures, but not escalate risk factors for the sake of it, as these are viewed differently in emerging markets.
"The challenge lies in the historically low transactions and some overstating values, resulting in increased volatility in financial statements," she said.
"Companies can use the land cost scenario for property under construction for example, hiding a loss-making development from their balance-sheet."
There's also a good reason why investment advisers and valuers keep a distance — results are kept confidential.
"There's a Chinese wall between investment and valuation departments to avoid conflict of interest," said Ahmad Saidali, Vice-President for Investment Fund & Advisory, CB Richard Ellis Middle East. "The value of a property could be perceived to be less if the value as a company is less."
Investment valuations require more than just figures. What's a must, however, is a decision on where the market is heading.
"The hardest time to do valuations is when the market takes off or lands," said David Rusholme, director at RICS Valuation Professional Group.
"There isn't much comparative evidence to go on in times of uncertainty and that reflects in valuations."
RICS is coming up with some new guidelines by the end of the year to take downturns into account. Rusholme warned not to take credit agency ratings and industry forecasts at face value, as they can be unreliable, citing Lehman Brothers' sudden fall from grace as an example.
"We need to look behind the quickly moving ratings," Rusholme said, adding that valuation is based on the interpretation of physical facts and hard data as much as on opinion or rational thought.
"For example, is the owner pushed by his bank to sell or not? A lot of valuers around the world are asking similar questions and seem to be spending more time studying the future of economies," Rusholme added.
