Property valuers are under fire

COMMERCIAL property valuers are again under fire — this time for being too conservative in their property valuations.

This is after criticism of the industry overvaluing properties.

RMB Properties CEO Warren Schultze, who was speaking at the presentation of the Sapoa/Investment Property Databank (IPD) SA Index in Sandton earlier this month, says valuers are “being too conservative” in valuing commercial properties in “current market conditions”.

Schultze says his concern arises from discrepancies between the property valuations done by the valuations community and the value at which fixed properties are being bought and sold.

He says there are also discrepancies between the valuers’ valuations included in listed property companies’ financial statements relative to the implied net asset values which are derived from the share prices.

Schultze says the values of property assets in financial statements of some listed companies could well be higher and approach the values implied through their share prices.

Schultze hopes valuers will take a “more positive view” of the commercial property market.

Valuers, however, do not share Schultze’s view.

In a letter to Business Day, valuer Tim Moulder, of Motseng Marriott Property Services, says he is “surprised” at the comments made at the Sapoa/IPD results function, particularly in light of the excellent performance of commercial property results.

All property showed a total return of 23,4%, the highest return seen in SA in a decade.

“Valuers are guided in their opinion of value of individual properties by comparing prices achieved by similar properties. Where sales evidence is limited — regional shopping centres for instance — valuers rely on indirect evidence and subjective judgment,” says Moulder.

He says the surveys carried out by IPD, which compare property valuations with sales prices, show a high level of accuracy.

Moulder also highlights that valuers value individual properties, not a listed property fund’s portfolio as a whole.

“The fact that a premium above net asset value is paid by investors in the various property funds is a reflection of the advantages of investing in a unitised vehicle, including risk diversification, liquidity over direct property investment, and is not a reflection of poor or conservative valuations,” he says.

Property economist and professional valuer Erwin Rode, of Rode & Associates, says valuers generally use recent, but nonetheless historic market information when valuing commercial property.

“When valuing an office block, for example, a valuer would consider recent sales of comparable buildings and extract from these sales important information such as the rentals achieved, operating costs incurred, vacancies, and the yields at which the transactions took place,” says Rode.

This information is then used in calculating the value.

“It therefore stands to reason that when any of these critical factors are fast changing, a valuer should be on his or her toes, and not blindly apply historical information,” he says.

Although Rode agrees that some valuers may be too conservative in current market conditions, he says one cannot show that valuers undervalue listed property funds by pointing out that many funds’ net asset values are at a discount to their unit prices.

He says that depending on when in the financial year of a listed property counter the comparison is made, the net asset value reflects the market values of the underlying properties at a date that might be anything from three to 18 months old.

“In a fast moving market, this time difference could be responsible for a highly significant difference,” Rode says.

Another explanation for unit prices trading at a premium is that investors are also prepared to pay more for stocks with higher liquidity, says Rode.

Len van Niekerk, property analyst at Andisa Securities, says the problem is that the listed property sector has outpaced the physical property market.

He says property valuations tend to be a “lagging indicator” of the property market.

“Valuation is not an exact science. If you valued something six months ago at R100m, what would you value it at today? Your starting point would be R100m,” says Van Niekerk.

Whether a property is overvalued or undervalued may also depend on what valuation is used.

“Some companies are happy to have their properties valued at less than what the market thinks they are worth so when they sell them they can make a profit on book value and make the company look good,” he says.

Some listed property funds, particularly property unit trusts, which can only borrow up to 30% of their total assets, would like higher valuations because they increase their asset values and in turn their borrowing capacities, Van Niekerk says.