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How to make Valuations more meaningful


According to Robert Harley’s weekly column, Property Observed, published in The Australian Financial Review (20 Nov, 2008), commercial property valuations should be treated with caution given the current state of the market.

The recent turbulence felt in financial markets has seen transactions stagnate and therefore there are no reliable sale prices to gauge comparable sale valuations and current capitalisation rates for disposal.

The article refers to a recent report written by Credit Suisse REIT Analyst, Mr Andrew Rosivach, who doesn't find tangible assets to be a particularly useful valuation metric given they are lies.

“They are based on backward looking comparables when everyone knows the market has fallen. We know the properties would be trading at materially higher cap rates, and lower values, than are in the books today and what we expect to see at December 31,” Rosivach wrote.

Estate Master Property Software’s founder, Martin Hill concurs with this learned view and recommends that current valuations need to reflect a property’s future cash flow streams to smooth the present uncertainty.

“Other factors now need to be taken into account including the higher risk of options not being taken up, lower rises in market rent reviews and higher vacancy risk with increased incentives,” Hill said.
Estate Master’s latest intuitive cash flow module, Investment Appraisal (IA), addresses many of these issues. Designed for property valuation and investment analysis, it allows clients to create a number of viable scenarios.

“We created the IA model to be used as an essential valuation tool. It includes the discounted cash flow (DCF) valuation approach and looks forward rather than backwards at past comparable sales and assumptions,” he added.

Hill recommends that Real Estate Investment Trusts (REITs) should consider this DCF valuation approach as a prudent metric for the end of the fiscal year’s book value revaluations.

“For the sake of the property industry’s reputation, we need to face facts and acknowledge these changed business conditions,” Hill said.

Date Published: 24 Oct 2009
Category: General News

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