Perception won’t match reality when it comes to working out valuations
The right moves
IF I was to offer you a square yard of carpet or a square yard of bogland, which would you take? A square yard of carpet costs more than a square yard of bog, yet most people choose a piece of bog. People see a tiny piece of bog as having more value; it would be fun to say you own your own bog and someday you might be in the way of a development and it might become valuable. This illustrates how different people can attribute different values to property and how valuers and their clients need to understand all the factors affecting a valuation.
Property valuation is described as both a science and an art. Most valuations are carried out by the “comparison method” where the valuer gathers information on recent deals on similar properties and compares those with the property being valued. The valuer must be careful in analysing comparisons because every property is different. If valuing a shop on Grafton Street it’s not enough to just compare with other lettings on Grafton Street, as the shape of each shop makes a big difference to the value. For investment property sales, market intelligence on tenant break clauses and guarantees becomes important.
Valuers maintain records of deals and valuers in different firms usually assist each other by swapping information. However “the gloves come off” between valuers at a rent review arbitration when part of the job is to undermine the relevance and accuracy of the other agents comparisons. Valuers in the larger firms will always seek the opinions of their colleagues on the agency side of the business as they may have fresh information on deals and “two heads are better than one.”
The usual basis of a valuation is the “open market value” and the conditions in the valuation report may describe this as “the price which a willing purchaser will pay a willing vendor given a reasonable timescale.” In the tumultuous market we have experienced, for some properties in secondary locations the timescale may be much longer than what was considered normal.
Similarly a “fire sale” value is different from the concept of market value used in the Chartered Surveyors Red Book. Thus, the “assumptions” on which a valuation is based can materially affect the value.
The “Red Book” is the valuation standard for most reports but again the market here means that standard assumptions may have to be altered. For large portfolios of properties being sold by banks, some valuers are providing “estimated realisation prices” rather than traditional “open market values”, due to the sheer numbers of properties being sold within short timescales. Another standard condition frequently deleted is the assumption that the valuer will inspect each property, which is impossible where thousands of properties are included in loan portfolio sales.
A valuation can be enhanced by assuming that planning permission will be granted for a development. This seems reasonable if the proposal complies with zoning but delays at planning or onerous conditions can affect the value significantly. Another dangerous assumption in a report is that “full services are available”, as are assumptions about the condition of the property and that it has “good marketable title.”
“Kerbside valuations” are sometimes sought by banks where time is short. Valuers must be careful in these situations as their opinions are being used without the protection of standard conditions.
Many properties have a “special value” to a particular party, for example the tenant of an investment property being sold will often pay over the market value. Retailers sometimes pay higher rents, just to keep competitors out of a location. Some properties have a “marriage value” which means they have a higher value when combined with an adjoining property.
These factors mean that properties can have different values to different parties at different times.
A property can have a different “price”, “worth” and “value” at the same time. Clients must understand the assumptions on which a valuation is based.
I was delighted to speak on customer service at the All Ireland Managers meeting for Specsavers last week. Specsavers has 47 stores throughout Ireland offering optical and hearing services. It was a pleasure to meet Dame Mary Perkins who co-founded Specsavers with her husband Doug in 1984 and the company now has over 1,600 stores worldwide. Sinead Clohessy, Chairperson of Specsavers Ireland told me that they opened three new stores in Ireland this year and employ 850 people.