Valuations key to navigating commercial property market
Total Property - Issue 3 2018
In the current market environment, knowledge is power, which is why valuation specialists are essential to the purchase and financing of commercial property.
Valuation professionals provide advice on the value of real estate and real estate-related investments, and their work is used by owners, investors, lenders and occupiers alike.
Valuation is a core function that underpins all property transactions and ownership. Used effectively it can be a fantastic addition to a purchaser’s arsenal of information.
A detailed valuation will help purchasers in their finance negotiations – at the very least it shows the banks they have done their research on the property.
Being unaware of the value of a commercial property asset, or having an unrealistic opinion of it, can lead to major issues down the line, particularly when it comes to seeking bank funding for the property.
A shift in credit lending criteria by the major banks has put new focus on valuations. Finance can, in many cases, hinge on the findings of a valuation report.
A reduction in the supply of funding by the Australian-owned retail banks, which dominate the New Zealand mortgage market, coupled with an increase in the cost of funding, has put pressure on the market. This is already evident in the development land sales market, where rising construction costs are proving challenging.
For veteran commercial property investors, stricter requirements are unlikely to be an issue, but those new to the market may not be aware of the influence a valuation can have on their finance prospects and how it can limit the possibility of post-transaction surprises.
Why are valuations important?
Forewarned is forearmed. There will be those that view a valuation report as an unwanted and unnecessary expense, but it provides potential buyers with a better understanding of the current and potential value of a property, enabling them to make smarter financial decisions and to understand and manage value risks effectively.
The most recent commercial and industrial property cycle boom has seen many of New Zealand’s larger property-owning entities, including Precinct Properties, Goodman Property Trust, AMP and Augusta, all upping the size of their portfolios.
Those enlarged portfolios have subsequently demanded a greater degree of valuation services, whether for financial and shareholder reporting, insurance purposes or refinancing. With several more years of construction work already in the building pipeline, particularly in Auckland, the need for valuation services at the very top end of the value chain is forecast to remain strong.
In terms of finance, the banks are a lot stricter than they were before. That has had an effect on investors who had previously been able to leverage their assets - their equity doesn't go as far as it used to. Valuation reports aren't simply a means to getting finance – they help investors gauge whether a deal is worth it.
The growth in demand for insurance valuations has also been driven by the consequences of the Kaikoura earthquake in November 2016. The physical impact of the quake on the Wellington commercial property scene sent a degree of nervousness northward. While earthquakes are relatively rare in Auckland, global insurance underwriters now view New Zealand as ‘one location’ - seeing little geographic differentiation between Christchurch, Wellington and Auckland.
Consequently, they are seeking updated valuations on hundreds of the bigger Auckland assets.
Meanwhile, across the entry-level to mid-range tiers of the commercial and industrial property markets, we see retail banks taking a more cautious approach to their funding allocations.
The major retail banks are focussed on matters that could affect their return and the value and enforceability of their security. There is much more emphasis on minimising risk, and the thresholds that need to be met to obtain funding have lifted.
In a market where lenders are being more selective about the projects they finance, it is essential for borrowers to demonstrate to lenders that they are mindful of the banks’ changing appetite to risk.
The banks won't lend money unless they have a valuation to rely upon. It's that simple. Those who have bought commercial property before know that it’s a crucial component of a commercial property transaction.
However, it’s not uncommon for first-time buyers or buyers who are new to New Zealand to be unaware of the rules and regulations. It's amazing how many phone calls we get from people who tell us, “We're settling in a week - can I get a valuation?”
Buyers need to engage a registered valuer well before the property they hope to acquire goes to auction or they could face difficulties securing finance.
Sometimes the numbers don’t stack up.
There have been instances where banks have point-blank refused to finance purchases because buyers have left it too late. This has forced buyers to seek finance from mezzanine lenders or family members to try and settle their properties.
It’s also critical that buyers hire only registered valuers. The banks have an approved panel of valuers, of which Bayleys Valuations is one. Valuations provided by non-panel members will be rejected, which means purchasers will have wasted thousands of dollars on a useless report and wasted valuable time.
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