TelferYoung (Taranaki) Limited
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Taranaki Newsletter - May 2009
18 May 2009
MARKET VALUE - IS IT A MYTH? VALUING DURING A RECESSION
It is a truism that banks and other financial institutions pay much more attention to independent valuation during a recession than during boom times when enthusiastic lending is generally covered by the rising market.
International Accounting Standards now in place have also focused the minds of company executives and boards of directors. As a result a few complaints have been heard from corporates that the required disclosure of current value can actually be harmful to general market sentiment. Despite the reservations expressed in some business circles there appears to be little prospect of any serious revisiting of the International Accounting Standards and the requirement to report the fair value of investment property.
It could be said that valuation as a concept is reasonably well understood in business and banking circles but perhaps the view taken of actual valuations is more jaundiced. For those with grey hair and experience property market downturns are nothing new, but few property professionals under the age of 40 will have had significant contact with such conditions. Feedback from Europe and the US would indicate the even battle-hardened professionals are experiencing something new with this worldwide recession.
Although values ha
ve fallen in the past, the rapid drops that have occurred in the Northern Hemisphere are virtually without precedent. Transactional activity has obviously ebbed before, but has not been accompanied by such a tight worldwide credit squeeze. Nor has financial institution collapse in the past been so wide spread as to result in virtual nationalisation of major lenders through Government refinancing. It can well be asked how anyone can value anything in such conditions!
Our response is that valuers equipped with suitable training and coal face experience aided by intellectual independence can soon prove their worth. Whereas valuation may have been straight forward when there was a high number of transactions in the relevant property sector, that is certainly now not the case. Mere reporting of a valuation number and a list of so called comparables is inadequate for all except the most straight forward compliance type or broad brush approach valuations. Property valuation advice in recessionary times requires an in-depth approach to be fully relevant.
We believe that the job of the professional valuer is to understand the market involved. When transactions are thin on the ground - which is almost always the case in a recession - the valuer needs to understand the collective mindsets of would-be buyers and sellers and the fundamental economic drivers of that particular market. This will mean being fully conversant with the reasons why property that is being offered is not selling, and at what price level buyers would enter the market. A market valuation is a proxy for price and prices in the real world are not established by what has gone before but by the future needs and expectations of buyers and sellers. These must be understood and replicated in valuation outcomes.
That is not to say that valuation in an inactive market is a simple task. Despite the difficulties, and although empirical transactional evidence may be lacking, a value arrived at using robust rationale based on thorough market understanding is generally more reliable than one based on so-called comparable transactions that may already be dated. The judgements involved touch on sentiment as well as fact as real prices in real markets reflect sentiment.
The need for impartiality and independence is, of course, beyond question but that requirement is topical in the light of what has occurred in the financial advisory field. Ethical standards are taken very seriously in the TelferYoung group and the profession in general but less experienced valuers clearly need the benefit of support mechanisms such as the oversight of a senior valuer or director and peer review.
The integrity of the valuation process often comes under attack from a flawed understanding of 
the valuation objective. It is sometimes argued that market value is too low because the market value definition requires there to be a willing seller. A few corporates have argued that since the company would not be willing to sell at that price it is of no relevance. This argument shows a lack of objective thought and perhaps just a little self interest. The International Valuation Standards make it clear that a willing seller in this context is simply a seller motivated to sell at the best price obtainable on the valuation date. Because market value is a hypothesis, the circumstances or policies of the actual owner are totally irrelevant. The fact that an owner can demonstrate that the property is worth more to him than could be obtained from a sale on the valuation date does not invalidate the market value.
A further variation on this theme is the argument that the only sellers in a falling market are forced 
sellers and therefore those sales are not evidence of the price between a willing buyer and seller. This again confuses what may be rational behaviour by an owner in the real world with the hypothetical world in which market value is created. There has to be a hypothetical seller willing to transact and, by definition, that seller is under no duress or compulsion. In the natural order of things very few sales are forced to the extent that the seller is under compulsion to sell in a timescale that does not allow for proper exposure to the market. Even sales by liquidators, receivers or mortgagees incur a duty to act reasonably and obtain the best price, although sales below the market level can of course take place from time to time.
In conclusion, property valuation in recessionary times is challenging but where the valuer understands
and is in touch with the marketplace, and applies impartial judgement, the advice produced will meet the required reliability test even when transactional evidence is thin on the ground. TelferYoung's ability to think nationally but act locally provides a leading edge in today's difficult property climate, while specialist expertise in leasing arrangements and dispute resolution procedures is also available.
Contact one of the directors for further discussion or information -
John Larmer (rural) Mike Myers (residential) Ian Baker (commercial)
Back issues of the newsletter can be obtained from TelferYoung (Taranaki) Ltd
143 Powderham Street,
P O Box 713,
New Plymouth,
New Zealand.
email: telferyoung@taranaki.telferyoung.com
| Telephone: | 06 757 5753 |
| 0800 VALUER | |
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+ John Larmer + Mike Myers + Ian Baker + Mike Drew + Adam Boon + Fintan McGlinchey
Opinions expressed in this newsletter are of a general nature and should be used as a guide only. TelferYoung should be consulted before acting on this information.