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.

Australian dwelling prices have experienced a 17-year high as the CoreLogic’s July 2021 report, saw an increase of 13.5% in the last financial year, the highest growth rate since 2004.

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?

AltX offers analysis of the property market

Given the fact that house price growth rates are finally slowing down, getting this right is a critical phenomenon for lenders and investors in property-backed markets and 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 many ways of valuing property,” says Property Analyst at AltX, Chris Mears.

“As is property valuation is emphatically based on the current state of the property, without taking into consideration any future developments to the building.”

“An ‘as if complete’ valuation on the other hand assesses a property asset’s value based on what the property is estimated to be worth when it is renovated, rebuilt or finished.”

One valuer might say a four-bedroom house in Coogee, Sydney is worth $5 million, while another might value it at $6.5 million. Both property valuers follow the same guidelines, consider similar evidence yet they come to significantly different price points.

In the instance where both property valuers can successfully 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.

AltX discusses the valuation aspects to consider

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 the 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 facilitate the acquisition of insights to know the real value of a property based on data, not abstract theories based on an overheated market,” says Chris.

“Our due diligence determines the market estimate and assess the lending ratio on property loans because if the valuation is too high and you lend the money, you have a lot to lose.”

If it’s too low, you’ll miss 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.

AltX’s opinion on hiring property agents

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

“It’s important to have good relations with local agents giving time on the phone.”

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

“They offer insights into accurate pricing and the underlying drivers of the market such as the target buying segment, best or worst streets, time on market and new developments.”

Agents are good with comparable sales evidence, and 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 that it is also an aspect of great importance to calculate the liquidity of the asset and its exit potential, just in case the property 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 assess and if needed, challenges, independent valuation reports.”

“They talk to agents, go on site visits and look at 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.