A property valuation is always worthwhile to an investor who seeks market information upon which to make a decision. Providing such information in a rapidly changing market presents a significant challenge for valuers. Valuers rely on historical information to provide evidence of comparative transactions to support the current value of a property. In the current market it is clear that relying on the results of the past may not be a good indication of the future.
In order to provide the best evidence of the market for a particular property the valuer needs to have a clear and detailed understanding of the psyche of both the buyers and sellers at the present moment. When this psyche or outlook is changing it becomes even more difficult to provide guidance on the value of a property. Opinions of value should always state an exposure period* to achieve such value. Generally the shorter the exposure period the more conservative a valuer needs to be in estimating the market value. All properties need an appropriate exposure period to the market so that amongst other things, information regarding the property and its availability can be circulated. But what happens when the market is deteriorating? Certainly it would appear that as each day passes the likely value to be achieved is less. So would a shorter exposure period not yield a higher value?
It is at this point that the question shifts from what is the value of the property to how long it will take to achieve that value. In the market today we are seeing vendors reduce their listing prices by 20% or more in the hope of getting an offer in the next 90 days. Should we as valuers then assume that the value of the property has fallen by at least that amount? As you can see there are many questions that are difficult to answer in a changing market. We believe that there is no substitute for market evidence (actual transactions) and a clear understanding of the level of activity and the motivation of the buyers and sellers. This can only be understood by participating in the market, thereby getting first hand information on the transactions being contemplated and consummated. The actual date of comparable transactions should also be underscored in a changing market, as a transaction that occurred six months ago may no longer be relevant in today’s market. The old saying that “one swallow does not make a spring” is also relevant in this case. Valuers must find trends in the market and not just individual transactions that may or may not reflect theoverall market reality.
When markets are stable, opinions of value are useful as a means of reassurance of what you probably already know, but when markets are changing intelligent investors seek market evidence to assist with decision-making. Even before the current market crisis, properties on our West Coast beachfront experienced six to 12 month exposure periods to achieve market value sales. There is no basis to assume that in a changing market those exposure periods should be any shorter. What seems to have changed though is the urgency that some vendors are facing to achieve a sale. This urgency affects the conditions of the sale and as a result the resulting price achieved cannot be considered a fair market price. It is very important to understand this when evaluating the market evidence that we find today. It would be very easy to reach the conclusion that these types of transactions are reflective of market value but of this we are not certain.
We have always characterized the Barbados market as “thin” or “shallow” in terms of transactions. The latter half of 2008 saw the least transactions of any period in the previous five years – and that was with a healthy stock of available units. Adding the factors together you can see that we have very few transactions to rely on and most of the transactions that are occurring involve some urgency on the part of the vendor. It is our opinion that investors need to be cautious in relying on such information as being reflective of fair market value.
Hopefully it is clear to the reader that in a changing market there is no substitute for relevant market evidence and that such market evidence needs to be properly investigated and the underlying motivations of the sellers and buyers needs to be understood. There can be no more appropriate phrase applied in the current market than “look before you leap” whether that leap be into or out of a property investment.
*Exposure period – the estimated length of time the property would have been offered prior to the hypothetical consummation of a sale at market value
Andrew W. Mallalieu, CPA MRICS – Managing Director, Terra Caribbean The Red Book 2009