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The Value of a Valuation

Monday, July 25, 2016 | By Symon Clarke , MRICS - Manager - Advisory Services
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The Barbados Real Estate market, like most, is complex, and for that reason, clients require the property valuation experts to provide Market Valuation reports for their various purposes. The interest you hold in a property heavily influences your perception of the property’s value. During this recessionary period it has been particularly challenging reconciling market reality with perceptions, given the general fall-off in market prices.

Not all market participants have adapted easily to the unprecedented changes. In addition to market decline, the global economic crisis has been followed by stricter policies and regulations on lending, financial auditing as well as amendments to Valuations standards. What once was a simple opinion of market value based on market knowledge has now evolved into attempts at scientific approaches to value with varying analytical metrics.

My career as a Valuer started just around the peak of the market in 2007. It was a simpler time and work challenges were of a different nature.  Those challenges have since had quadruplets which all now have grandbabies. The obvious challenge is reporting declining figures; another is managing clients with opposing interests or roles. To illustrate my point I will highlight just two examples.

OPPOSING PERSPECTIVES

Companies with real estate investment portfolios are required to record the market value of their assets on their balance sheets. When the values of assets decline, all else being equal, this impacts both the income statement and balance sheet negatively. This leaves us with a potentially dissatisfied client and we may even receive an irate call or two questioning the reduction in value. However, the financial auditors of these reports on the other hand, typically measured in their approaches, may take the view that some figures are not as conservative as they could be, in light of the economic conditions. One party thinks the value is understated, the other possibly overstated.

VARYING VALUATION USES

Beyond personal interest, the expectation of market value today is often compounded by the purpose for which a valuation is required. If and when a property owner decides to sell a property in today’s market and instructs a valuation to assist the sale, a ‘high’ Market Value is often expected. There is no fault in this. Everyone wants the highest possible return. However, in a different scenario, a property owner who requests a Barbados real estate market valuation report to file an objection to the value assessed by the Barbados Revenue Authority (BRA), ultimately in an effort to reduce taxes may require a ‘modest’ valuation to support the objection. From the owner’s perspective, are these two ‘values’ the same number? More often than not, the answer is no!

PROFESSIONAL RESPONSIBILITY & DUTY OF CARE

Prior to the recession, Barbados’ real estate market had a track record of steady appreciation dating back an estimated 50 years. Now we have seen that market values can change/fluctuate with economic conditions. The difference is that the definition of market value remains constant.

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after properly marketing and where the parties had each acted knowledgably, prudently and without compulsion”. In layman’s terms, how much is a purchaser willing to pay for a property that will be acceptable to a vendor, on a specific date, after it had been exposed to the market for a reasonable period (some would say at least three months), with both parties having no prior involvement, are exposed to all the facts and neither is compelled to take action. The definition of Market Value and actual Market Value, are invariable to the purpose of the valuation.

With the variances between perceptions and reality, how are we as Valuers able to keep all of our clients happy at all times? The answer is that we value our clients and our primary responsibility as valuation professionals is a duty of care to them and those relying on our reports. This means a high level of competence, ethical conduct, independence and objectivity. Sometimes we have to be the doctor delivering the bad news. What is important is that accurate news is delivered so that appropriate action can be taken.

 

MORE THAN JUST A NUMBER

A statement of Market Value represents the opinion of the person preparing the report. A well-prepared property valuation documents all of the facts, with conclusions well supported by current market data, data analysis and professional judgement. The information contained therein goes well beyond what one would extract from a real estate publication or newspaper. Valuations are not meant to predict the future but well-prepared valuations are comprehensive, allowing clients to make well-informed decisions and to plan carefully for the road ahead. A valuation is one of the key steps to not only determining the level of investment to be made or potential return, but can assist in more strategic actions such as whether to hold, renovate, or when to divest of a property.

KNOWLEDGE IS KEY

As a consequence of the economic crash, key financial stakeholders have tightened their policies and regulations. Some commercial banks have adopted the services of external Appraisal Management Companies (AMCs) in an effort to streamline the valuation process and to create uniformity of reporting by Valuers. There have also been some changes in Financial Accounting Standards and auditors are exercising greater scrutiny in their reviews. Further to this, some have requested independent reviews of work completed by industry colleagues. Valuation Standards are forever evolving as markets continue to change. Precautionary measures are being exercised from all angles, and justly so. Real estate could potentially be the most expensive investment made over the course of one’s life. The decisions surrounding such should not be taken lightly or entrusted to the average Joe, particularly in today’s environment.

A valuation professional should have a high-level of knowledge and expertise acquired through professional qualifications and/or constant exposure to the real estate market; the latter is very important, as there are many intricacies in the market, which cannot be found in a textbook. Though there is no local regulatory body for real estate valuers on the island, most local professionals follow the Professional Standards as set by the Royal Institution of Chartered Surveyors (RICS).  These standards ensure that valuers are executing their duties with the highest level of professionalism and integrity. Terra Caribbean is an RICS Regulated Firm with five RICS Chartered Valuation Surveyors. We believe our clients can feel assured of our quality reporting. We are unwavering in our commitment to professionalism and our adherence to the guidelines of the RICS.  Over the years, we have been able to build better valuation models through the data we compile in our database on a daily basis. Valuation reporting today has advanced well beyond what it was years ago as our work has evolved with the market and we have enhanced it with technology.

IN A NUTSHELL

Market Valuations can be critical to property-related decisions. With the fluctuations in market conditions, the market value of a property at a particular point in time should not be assumed without the relevant advice. We therefore encourage all existing and prospective property owners to seek the appropriate guidance to assist in their property-related matters.  

This article first appeared in The Red Book 2016.

ABOUT THE RED BOOK

The Red Book is a comprehensive review of real estate in Barbados that is widely used as an industry and investor guide. For over a decade, The Red Book has been the principal source of information on the market, covering available inventory complete with data analyses pertaining to each segment. Check out this year’s Red Book for more Barbados real estate market insight.

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