Valuation challenges for commercial real estate
Commercial real estate valuations will need to become more scrutinised as the COVID-19 pandemic may raise potential issues when it comes to accounting and valuation standards, according to a paper.
A joint paper from unlisted property funds industry body Property Funds Association (PFA) and property valuation firm Preston Rowe Paterson said one of the key challenges to accurate property valuations was the speed of the virus’ impact on the economy, lack of comparable property data, and the impact from newly legislated Commonwealth’s Commercial Leasing Code.
PFA chief executive, Paul Healy, said he was almost certain lenders, regulators, and auditors would heighten the scrutiny of investment real estate valuations.
“As an industry we are all in this together and it’s important we defer to the recognised accounting and valuation standards,” he said.
“These fair valuation standards weren’t all available during the global financial crisis and will help property to navigate the COVID-19 crisis. It’s important we have some uniformity around valuation, which will benefit all in the property investment industry.”
The paper said it was likely there would a period where the market was “starved of sale and lease transactions struck after the announcement of the pandemic”, which would ordinarily allow the direct comparison methodology to apply.
The code, it said, would also have a profound impact on investment real estate cash flows for the period of the pandemic, and “as espoused in the code, a reasonable recovery period, which will in turn impact the underlying value of the asset based on pre-COVID 19 cashflows”.
“It is obvious that cashflows will be impaired for an uncertain period of time, relative to lease contract cashflows,” the paper said.
All these issues would also increase the time commitment in managing investment real estate due to the detailed and complex negotiations between landlords and tenants.
The JobKeeper stimulus also needed to be taken into consideration and the challenge for valuers would be to corroborate assumptions relating to cashflow forecasting.
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