Is the price right? Why property valuation is critical in a hot market


Investors and lenders should look beyond the face value of valuation reports in a red-hot market, according to alternative investment platform and private debt specialist AltX.

In the last 12 months Australian dwelling prices have experienced a 17-year high. According to CoreLogic’s July 2021 report, they have increased 13.5% in the last financial year – the highest growth rate since 2004.[1]

Historically low interest rates coupled with low housing stock, falling unemployment, and elevated consumer confidence have been driving prices up, even through the latest lockdowns.

But is this growth sustainable? Will the market level out or will prices come down? Given house price growth rates are finally slowing down, getting this right is critical for lenders and investors in property-backed deals. It can be the difference between making a successful investment and losing hard-earned capital.

The Goldilocks of valuation

Working out what a property’s real value is can be difficult. Although the Australian Property Institute has developed set standards for valuing property for loan security purposes, the process of valuation can get a little murky.

There are several different ways of valuing a property, says Property Research Analyst at AltX, Chris Mears.

“An ‘as is’ valuation is based on the current state of the property, not taking into consideration any future developments to the building. An ‘as if complete’ valuation on the other hand assesses an asset’s value based on what it will be worth when it is renovated, rebuilt or finished.”

One valuer might say a four-bedroom house in Coogee, Sydney is worth $5m, while another might value it at $6.5m. They both follow the same guidelines, consider similar evidence yet they come to significantly different price points. Both can justify their valuations as ‘technically’ correct.

But which number can lenders and investors rely on? And does it matter?

For example, one valuer might have a much deeper understanding of the property or area. There may have been a recent sale to a developer in the same street for instance, which could open up an entirely new market and price point for the property. Another valuer may have a deeper database giving them a better understanding of the relevant and applicable leasing and capitalisation rates.

Valuations are based on data from the date of settlement rather than the date of exchange. For instance, a property that exchanged in August 2020 might only settle in August 2021, in which time market conditions have changed significantly. Yet a valuer will consider this as a good comparison as the settlement is current.

With a three-month shelf life, valuation reports are more critical to get right for short-term lending market than the traditional longer term residential mortgage market.

This is why lenders and investors of property-backed deals need to dig deeper.

“At AltX, we want to know the real value of a property based on data, not abstract theories based on an overheated market,” says Chris. “Our own due diligence lets us accurately determine the market estimate and assess the optimum lending ratio on property loans. Because if the valuation is too high and you’ve lent the money, you have a lot to lose. But if it’s too low, you’ll likely miss out on the deal. It’s the Goldilocks of lending – you have to get it just right.”


Looking beyond valuation

Mears suggests valuation is only the first step in assessing a property’s worth. There are several other factors at play.

Council records can offer some great insight into what investors might be getting into.

“Development applications and consents indicate if approvals have lapsed, or any illegal buildings on the property,” says Mears. Zoning is also an important indicator of the property’s development potential.

Mears says it’s important to have good relationships with local agents who will you give time on the phone.

“Real estate agents are often at the coal face of the particular asset you’re looking at and can provide some useful advice on the market – including insights that might not be publicly available,” he explains.

“They can give you insights into accurate pricing, and the underlying drivers of the specific market, such as the target buying segment, best or worst streets, time on market, and new developments. Agents are also good at helping with comparable sales evidence, and might see or know things specific to the area that valuers might miss. But you also need to read between lines, as they like to talk up prices.”

Mears says it’s also important to calculate the liquidity of the asset and its exit potential, in case investors need to free up cash quickly.

“At AltX, we make sure we get a 360-degree view of an asset before we enter a deal. Our internal valuation team assesses and if needed, challenges, independent valuation reports. They talk to real estate agents, go on site visits, and look at current properties on the market. They look through council records, consider zoning, location and the development potential of every property.”

While some deals look like a great opportunity, investors need to do their due diligence before jumping in. And in a red-hot market, that matters more than ever before.

[1] CoreLogic, Hedonic Home Value Index, 1 July 2021


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