Valuation matters – getting the price right in a hot market

26 Aug 2021

Valuation matters – getting the price right in a hot market

26 Aug 2021

Valuation matters – getting the price right in a hot market

Chris Mears, discusses why getting the price right in a hot market is more important than ever.

"The worth of a property can vary from one valuer to another. But if you’re investing short-term, getting the value right is more important than you might think." Property Research Analyst at AltX, Chris Mears explains.

Q: How is the current market impacting property valuations?

Mears: We’ve seen very strong growth in certain parts of the residential property sector recently. That’s due to low interest rates, stock shortages and the highest savings rates we’ve seen.

According to CoreLogic’s July 2021 report, Australian dwelling prices rose 13.5% in the last 12 months – that’s a 17-year high. But is this growth sustainable? Will the market level out or will prices come down? We’re starting to see house price growth rates slowing down, so getting valuation 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.

Q: Why is there a discrepancy between some valuations?

Mears: 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. That’s because there are several different ways to value a property.

You can base it on the current state of the property, or ‘as is’, not taking into consideration any future developments to the building. Or you can assess it based on an ‘as if complete’ valuation, looking at what it will be worth when it is renovated, rebuilt or finished.

Whilst valuers can argue that their conclusions are ‘technically correct’ (as they followed the regulated API guidelines), one valuer may have more superior knowledge of the property or area than another. For example, there may have been a recent sale to a developer in the same street which may open up an entirely new market and price point for the property.

Or a valuer may have valued a property previously, giving them better insight into aircraft noise impacting the property for instance. Or they might have a deeper database and hence a better understanding of the applicable leasing and capitalisation rates.

That’s why it’s important to dig deeper to get an accurate view of a property’s value.

Q: Why is getting valuation right so important for short-term lenders and investors?

Mears: Valuations are also 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.

A valuer’s professional indemnity insurance restrictions mean that reports only have a three-month shelf life. As a result, the short-term lending market (generally 6-9 months) has a far more focussed interest in valuation accuracy, compared to the traditional longer-term (25-30 years) residential mortgage lending market.

That’s why at AltX, we want to know the real value of a property based on data, not abstract theories based on an overheated market. 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.

Q: How does AltX give its investors confidence in its valuations?

Mears: At AltX, we get a 360-degree view of an asset before we enter a deal. Getting an independent valuation is just the start.

Our internal team of property experts, credit analysts, quantity surveyors, and civil engineers also go through a stringent appraisal process. They read, assess, and if needed, challenge valuation reports and look at the basis of the valuation.

They talk to real estate agents, go-to site visits, and look at current properties on the market. They go through council records and consider the zoning, location and development potential of every property. And of course, they also look at the borrower’s credentials.

The team also calculates the liquidity of the asset and its exit potential, in case the borrower defaults.

Combining our own due diligence with strong valuer relationships allows us to accurately determine the correct market estimate. This in turn helps us assess the optimum lending ratio for each property loan. And that’s why we have returned 100% of our investors’ capital since day one.

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