How important is land when buying apartments?

It is one of the so-called “golden rules of property”; the driver behind the price increase of any property is land value.

Mark Twain famously summed this up when he wrote that land is the best investment because “they are not making any more of it”.

That seems straightforward enough, but does this golden rule work when it comes to investing in apartments?

What is land content value?

According to this theory, the capital growth driver of an apartment is driven by the value of the land embedded in its price.

The mechanics of this approach are simple: if a complex of 20 units sits on land worth $4 million, each apartment has $200,000 worth of land value and if a unit sells for $450,000, its “land content value” is 44%.

Many property advisers will tell you to aim for an apartment with content value of at least 40%.

If you are an owner of a unit in areas like Brisbane’s Southbank or Docklands in Melbourne, this theory may come as a bit of a shock.

It is quite common for these owners to be told via council or bank valuations that their land content value is as low as 5%-15%.

Does that mean these properties will only experience low growth?  Well no, not necessarily.

It’s about market demand …

If high land content theory was an iron law of real estate, then many apartments in New York, Paris or even Sydney’s Potts Point for that matter would have proven to be a terrible investment.

Yet in many of the world’s most expensive cities, high-density units with low notional and values are the norm.

The reason units in some of these areas have had above average growth comes back to that other real estate rule: the mechanics of supply and demand.

If a market in a high-density location, like Monaco or central Sydney, has 4,000 apartments for sale and 6,000 interested buyers, the price of units will rise even if the notional land content value of these units is low.

In these markets, it’s the competition between buyers for “available space” which better explains what is really going on.

… and market supply

What happens when we reverse the equation: more units for sale than interested buyers – will values will stagnate or fall?

The short answer is that they can. We’ve seen some instances of this play out over the past 20 years in cities where there has been a big increase in high rise living. When the numbers of apartments for sale outpaces the numbers of buyers, prices
have stalled or fallen.

The problem here is not the low notional land value of units; it’s usually a case of development running ahead of demand. When you look at some of these precincts years after that over-development phase has ended, in many cases the sale prices of units is growing again.

Where it holds true

In suburbs surrounding most of our capital cities, detached houses are the dominant property type with just with a sprinkling of apartment complexes. In these markets, land content theory is a good guideline.

But in areas increasingly dominated by high and medium-density living, land content theory is not that helpful.

In these areas it is the “competition for available space” which is a much better guide.

  • Paul Thornhill (realestate.com.au)

Too loyal or time-poor for a better rate? Problem solved

Another month, another rate cut. Finance can be so tedious.

That is until you realise it could mean more money in your pocket. But how?

For many, matters of personal finance are so dull and/or difficult, they are immediately filed in the too-hard basket.

And for their trouble, or lack thereof, these people are often slugged with a ‘lazy tax’ – the price paid for staying put.

Loyalty too, or simply being time-poor, can also be offences punishable by debt in the world of finance.

But it doesn’t have to be this way.

A 2018 Australian Competition and Consumer Commission (ACCC) report showed that new borrowers with an average-sized residential mortgage paid up to $850 less a year in interest than existing borrowers with the same lender.

However, despite the apparent benefits, actively ensuring an interest rate remains suitable is a practice that continues to elude many.

Fortunately, there are people out there whose job it is to assist in this process.

Mortgage brokers can play a vital role in assisting borrowers through the process of ensuring their mortgage is competitive.

We at Brickhill Financial Solutions in North Sydney are just a phone call away and are ready to guide you through the task of refinancing your loan.

What’s your home really worth?

Type your address into any number of free ‘what’s your home worth’ websites and an approximation of your home’s market value pops onto the screen in the blink of an eye. Easy.

But no matter whether the figure you see sends your heart soaring – or sinking – take a minute to consider how accurate that value could be. What about the bathroom upgrade?  The new kitchen? The barbecue area? All that money has to account for something.

Unlike other assets like your super, your home doesn’t come with an annual statement that shows what the place is worth at any point in time. But there are times – like when you need to refinance your home loan, that it can be extremely helpful to have a reasonable idea of your property’s market value.

There is a range of valuation options to choose from beyond the freebie websites. Each offers varying degrees of accuracy, and as is often the case, you get what you pay for.

A market appraisal

One cost-free option is to have your home assessed by a local real estate agent. This gives you the benefit of a local expert walking through the property in person. The downside is that a market appraisal is not the same as a formal valuation, and the final figure could be bumped up if the agent thinks a listing could be gained.

Automated valuation models

Further along the scale are ‘automated valuation models’. These are a user-pays service usually provided by property research companies.

For a small fee, you provide your address, and a value for your home is computer generated based on recent sales figures in your neighbourhood.

It’s a budget-friendly option though the figure you end up with is based on a wide number of previous sales – and the homes sold may be nothing like your own.

Electronic valuation

If you’re willing to pay a bit more, a desktop assessment or ‘electronic valuer review’ can crank up the accuracy factor.

An estimate of your home’s value will be provided by a property research firm based on recent local sales data backed by either a current photograph of your home or a phone discussion between you and a valuer.

This type of valuation lets you provide more detail about your home but without a physical inspection of the place the valuation is far from watertight.

Go pro – call a registered valuer

If you’re looking for a rock-solid estimate of your home’s value, the most accurate (and costly) option is to have your home checked inside and out by a registered property valuer.

These guys are experts, and the valuation you receive is based on local sales results combined with an analysis of current market conditions, reviews of any proposed council developments in your area and of course the quality of your home (so it’s worth giving the place a spruce up before the valuer arrives).

The figure you will end up with is an estimate of what a willing buyer would pay for the property on the day of the valuation. Sounds fair.

Do you really need to pay for a valuation at all?

You can expect to pay upwards of several hundred dollars for a formal valuation of your place. But here’s the thing. While it is always interesting to know, or at least have a reasonable idea, of your home’s value, chances are you may not need to pay for a valuation at all.

If you are refinancing or topping up your loan, it’s likely the lender will conduct an independent valuation of their own.

Rental yields – what you need to know

Rental yield – essentially the rate of rental income returned against the costs of an investment property is a great indicator of a property’s investment potential. But you need to keep things in perspective when you factor it into your decision to purchase property.

Calculating rental yield

A good first step in examining rental yield’s impact on the investment potential of a property is to recognise that there are two types of rental yields, gross and net, and they are calculated differently.

In property, gross rental yield is calculated by dividing the annual rental income you receive by the property value, and then multiplying this figure by 100.

For example, if you collect $20,800 rent annually ($400 per week) and your property value is $450,000, it will look like this:

$20,800 (annual rent) / $450,000 (property value) = 0.0462

0.0462 x 100 = 4.622

The gross rental yield is therefore expressed as 4.622%

Presumably, the higher the rental yield percentage, the better, as it suggests a more efficient return on your investment – more bang for your buck.

Knowing a property’s gross rental yield is a quick way to make a rough comparison of how its rental returns fare with others in an area, but it does not give a full picture of the investment potential a property offers.

But the gross rental yield can be misleading.

Net rental yield, on the other hand, offers a more detailed picture of a property’s rental return. To calculate net rental yield, you also factor in the costs and expenses you incur in addition to your property’s value.

The list of costs and expenses is extensive and can include stamp duty, legal costs, building inspections and recurring expenses such as maintenance and repair work, council rates and loan interest repayments.

If you deduct $5,000 for annual costs and expenses from the annual rental income in the gross rental yield scenario in the example above, the net rental yield is 3.5%.

Of course, the credibility of net rental yield is dependent on the accuracy of assumptions you make about the cost of repairs, the property’s market value and the property’s occupancy rate.

A building inspection might reveal dormant issues that will drastically increase future repairs and maintenance expenses. Rental yield might be high for those properties occupied in the neighbourhood, but that doesn’t mean the property you have in mind will be occupied all year-round – vacancies in one street can vary from the next, too.

Rental yield is only one factor to consider

Calculating rental yield should only be part of your assessment of a property’s investment potential. To do due-diligence and ensure you’re making the right investment, it’s also important to consider the resale value, investigate market reports, demographics, sales and rentals history in an area, planning and infrastructure, and the story of the building.

Brickhill Financial Solutions can help you further evaluate the benefits and the issues to consider when purchasing your investment property in Sydney.

renovation floor plans

Home Renovation Adjustments to Do Post COVID-19

Now that most people are adapting to the new normal, you should expect some changes to occur in all aspects of your life. You can observe it from the simplest way of buying groceries to the modifications in the home renovation process. Everyone needs to practice precautionary measures to keep all people involved in the project safe and healthy.

If you are about to have a home remodeling project, here are some things you can also adjust as a homeowner to accommodate the new normal when it comes to renovation:

Decide your setup

Choose whether you would stay in your home during the renovation process or somewhere else. Whatever you choose, you need to make the necessary preparations. 

If you prefer to keep an eye on your home renovation, the best choice is to stay at home. Only note that the activities you can do inside your home will be limited, and the whole stay could be more stressful than usual. 

You can always make the right adjustments accordingly. For example, you can turn an area in your bedroom into a vanity area if your bathroom is under construction. If your kitchen is for renovation, you can utilise and set up your grill outdoors. Make sure you are comfortable with these little changes. If you need a little motivation, remember that you will only endure it for the whole construction duration. 

On the other hand, if you are confident that your contractors can do an excellent job in renovating your home on their own, and you do not like to experience any of the mentioned limitations above, consider making arrangements. You can stay somewhere else or go to that family trip you have been longing to have(as long as the borders remain open). 

Pack up and move things

To make things easier for your crew, consider clearing up the room for remodeling. Aside from giving the workers more space to do their craft and enable social distancing, you also ensure the safety of your things. You can either move them to another room in the house or rent a storage unit for the whole work duration. Always park your car outside too to free up space in the garage or the storage area. It will also keep your vehicle away from any harm during the construction.

Always communicate with your team

Whether you choose to stay away or inside your home, communication with your construction team is always essential. Proper and constant contact can help you achieve the result you want because you can relay your message well and manage your expectations better. 

You should be specific with the type of communication interval and medium you want. For example, if you wish to have daily video calls with the builder or project manager, feel free to ask for it. You are the client, so you can request for any format that would make you feel more comfortable with the whole process. 

Conclusion

There are little inconveniences a remodeling can bring, but know that these can be addressed with proper planning and small adjustments. Always remember that the result of all these changes will be worth it. Also, make sure that the team you will work with will practice the health guidelines and proper safety measures to keep them and your home safe from any health threat.

If you need property finance in the North Shore for your dream St. Ives home renovation, we can always assist you. From funding for a quick home renovation or refurbishment to business financial assistance, Brickhill can help you. Contact us today, and we’ll find and arrange the right funding for your needs. 

woman in her home office

3 Important Considerations When Building a Home Office

While home offices have been around for a long time, they have become even more prevalent now due to the ongoing pandemic. Businesses have been forced to shut down their offices and have their employees work from remote locations in an attempt to slow down the spread of the virus.

If you are one of those and have decided to set up an office in your home, it can pay to know the essentials that you need to have. Not only will this guarantee that you have everything you need to continue working, but it may also let you feel as if you were at your original workplace.

Here is all that you need to know to build a proper home office:

1. Equipment and items

When it comes to the stuff in your home office, you will want everything that will help you work comfortably. After all, when you are happy with your office, you tend to be a lot more productive, not to mention pump out quality work.

With that said, here are a few things you can consider having in your home office: reliable internet, a comfortable chair, a big monitor or two, and a printer and scanner. There are plenty of other things you can include as well, such as a large table, filing cabinets, and organizers, most of which are optional.

If there is one thing you will need for your home office, however, it is a dedicated room for your work. You do not want to set up your office in your bedroom, let alone your kitchen. Having a dedicated room will help you enter the working mindset, whereas working elsewhere will leave you continuously distracted.

2. Budgeting

If you are starting your home office from scratch, it pays to have a budget set up; you do not want to spend your entire life savings on one room, after all.

Other than keeping you from overspending, a budget also helps you realize what is more important in terms of what to buy, allowing you to prioritize your needs and allocate your money accordingly.

For instance, if your work involves minimal printing of documents, you can minimize the amount you spend on printers and allot that money towards an ergonomic chair. 

Do note that many of the expenses you incur for office equipment are tax-deductible. This helps save even more money, allowing you to purchase better equipment that can improve your workflow even further.

3. Financing

Even with the best budgeting and planning, you can expect to spend a couple hundred to a few thousand dollars on setting up your home workspace. If you do not have the money for it, you can consider financing.  

For example, if you have plans to spend tens of thousands of dollars on building a dedicated space in your home, you can opt for a construction loan to take some of the burden. On the other hand, if you are going for cheaper renovations, you can pay with the equity on your home or opt for another kind of loan.

Conclusion

The main takeaway from this article is to plan your home office thoroughly. Simply grabbing your laptop and starting to work on your sofa might work for a while, but if you want to ensure that you can work to the best of your abilities, set up a home office now.

If you think that this investment is a waste, think again. Even when the pandemic is over, businesses might continue allowing their employees to work from remote places. In other words, you might be able to continue working from home, saving you plenty of money in terms of transportation and other expenses.

Are you looking for home loans and property finances in Killara or St. Ives to help finance your home office? Brickhill can help you achieve your financial objectives! From home loans to commercial property finances, we can help you select the right funding solution to make your dreams come true. Get in touch with us today.

new home for sale

4 Practical Tips for Finding the Right Mortgage Broker When Buying a Home

Anyone will tell you that buying a house is truly a life milestone. As such, it’s not a matter to take lightly. When you are finally ready to buy property, you need to make the right decisions. Additionally, you’d want the process to go as smoothly as possible. A mortgage broker would be helpful in times like this to help you get the best mortgage loan options and rates to suit both your budget and your needs.

Do You Need a Mortgage Broker? 

Make no mistake, home buying can be done completely on your own. That is, if you have plenty of time to spare and you don’t mind poring over piles of paperwork. However, if you don’t have the time and you would rather have an expert help you get the best mortgage rate, hiring a mortgage broker is the best course of action.

There are a lot of mortgage brokers out there, and it can be overwhelming to choose which one to hire, especially if it’s your first time doing so. To help you find the right one for you, here are some tips to consider: 

1. Check Your Financial Status

Before you purchase a home and actually look for a mortgage broker, you need to assess your financial health first. If you have a poor credit score and you have employment issues, then you might not be a good candidate to get a mortgage. Should you talk to a mortgage broker that says you’re qualified even though you believe you’re not, you might want to think twice. 

When it comes to the home-buying journey, it’s essential to have an honest broker. An honest mortgage broker will set realistic expectations for you, especially if you don’t have a desirable financial status. 

2. Consider the Fees

Most mortgage brokers do not charge fees. They are paid by the lender and only if the loan proceeds. By agreement they may charge fees. To help you make the right decsion it is essential to confirm if there are any fees to be paid. 

3. Know Which Lenders They Work With

There are some lenders that do not work with brokers at all and instead rely on in-house loan officers. As such, you need to ask a potential broker which lenders they work with. This will also help you determine how vast their network is. It’s best to work with a broker that is associated with a lot of lenders because you will be potentially be presented with many more options, helping you get the best rate. 

4. Ask For References

Before you decide to work with a mortgage broker, another thing that you should do is to ask for references. You can ask about their previous clients and see if you can speak directly to them. This way, you will be able to determine if the mortgage broker is a reliable one. It is also helpful to look at the testimonials they may have received.

Ask their previous clients important questions, such as how the broker communicated with them throughout the process or how the broker handled hiccups along the way. 

Conclusion

There is nothing wrong using a mortgage broker—in fact, it will give you an advantage in the housing market, as long as you know how to find the right one. Hopefully, following the tips we’ve listed above will lead you to the right mortgage broker, making the home buying process that much easier for you.

At Brickhill, we help individuals and businesses find the right property finance in North Sydney, helping you get the house of your dreams with the best rates. Contact us today to learn more!

Thinking of Renovations

It’s been more than 25 years since Tom Hanks and Shelley Long showed us the calamitous side of renovating gone wrong in the comedy movie, The Money Pit, but the warnings ring loud and clear today.

With a sluggish property market, many homeowners are opting to renovate rather than relocate. Before you hit the hardware store and strap on the tool belt, here are my top tips to renovate your way to reward, instead of ruin.

1. Renovate or rejuvenate?

You don’t have to tear down walls or add a new storey to add value to your home. If you need extra space, you will probably have to renovate.

But there are plenty of ways to add value without making drastic structural changes: paint a new colour scheme inside and out; clean up and replant an overgrown garden; replace floor coverings or sand and revarnish existing timber floors; spruce up old windows with some modern shutters; or create some extra storage with built-in wardrobes.

2. Know what you can and can’t do yourself.

Not the DIY type? Face defeat early and call in experts to tackle the job. It may be difficult to part with money for something you feel you can do yourself, but if you botch the job, you will pay more in the long run. There are some jobs even skilled DIYers should not tackle for safety reasons, including electrical work, asbestos removal, and roofing.

3. Target your market.

If you are buying a property specifically to renovate for profit or tarting up your existing home for sale, consider the likely buyers for the neighbourhood. Remember you’re not renovating for your own lifestyle and tastes, so keep colour palettes neutral and avoid fittings that are overly artistic or unusual.

4. Take a peek at the competition.

Visit some of the fully renovated houses in your area that are up for sale to see what the market is prepared to pay and what buyers are looking for. It will give you a good handle on which features help differentiate one property over another and current values.

5. Don’t overcapitalise.

It remains the golden rule of renovating and is particularly poignant in the current market. Cost every aspect of your project and be realistic about the value it will add, especially if you are planning on staying in the property for only a couple of years or less.

If you plan on living there for more than five years, you have a little more leeway to recoup the value of your renovation at sale time.

However, it’s still wise to keep at least a 20% margin between what you spend and the current value in case you have to sell sooner than expected.

6. Don’t start what you can’t finish.

If you don’t have the money to undertake your project, don’t start. Some renovators kick off their project with an aim to saving up along the way. If your savings fall short you may be left with an unsightly, unfinished project, which will curtail your capacity to sell if needed.

Chances are you will also lose interest in taking on future projects, so make sure you have all the money you need upfront.

Property Valuations and COVID-19

The impacts from COVID-19 are yet to be seen in a property market context as transactions generally follow a due diligence process and are less liquid than the public market of the stock exchange. In terms of valuations, we are seeing valuers starting to utilise disclaimers highlighting ‘valuation uncertainty’. Valuers draw upon previous transactions to form opinions of value and these have now occurred in a different market environment to what we are currently experiencing. 

Whilst the consequences of travel bans, isolation, consumer uncertainty, supply chain disruption, stock disruption and job loss are still evolving, we set out below our considerations on the impact the pandemic may have on the property market and valuations throughout 2020.

 What happens to value?

To appreciate what may happen to value, it is worth remembering the definition of value which contemplates a willing buyer and a willing seller and what they are prepared to transact the property for, at the effective date.

What these parties will consider in their disposal / purchase decisions are the various assumptions that feed into valuation analysis, of importance:

  •  Rental and cashflow
  •  Yields and discount rates
  •  Vacancy and prolonged impacts

What happens to rental income?

The government’s reaction to COVID-19 pandemic has been to enforce strict social distancing policies forcing businesses to close, with some property owners being faced with the inability for tenants to continue to pay rent in some cases. This has further been supported by the government encouraging landlords and tenants to ‘talk to each other’ about rent relief. While rent payment is the tenant’s legal obligation, loss of rent and tenant fall over can be anticipated, noting some retailers have publicly announced they will not be paying rent1 .

We suggest an analysis of tenants can be undertaken to establish a revised cashflow for a property, taking into consideration history of tenant arrears, business models of tenants in terms of whether they provide discretionary or essential services, their trading performance since the impact of COVID-19 and their share price, if listed. In terms of retail, turnover rents are likely to dissipate except for the likes of supermarkets. Analysts may consider factoring in periods of loss of income, abatements, deferred rents, increased incentives, tenant fall over and extended periods of vacancy. Vacancy levels of 10-20% could be witnessed as small businesses and retailers already under pressure prior to the impact of COVID-19 fold.

What will cap rates do?

A question a valuer always gets asked! With the above cashflow implications in mind, and having performed some analysis and discussed with clients, worldwide colleagues and auditors, we consider property will be affected on a case by case basis. Prime assets are likely to remain sought after given their more secure cashflows with stronger tenant covenants to banks, government tenants and large corporates with locked in leases and minimal near term capex requirements.

Secondary grade assets of late have had almost divergent yields to prime stock. However if an asset’s tenancy profile is deemed to present cashflow and / or vacancy risk, a softening of cap rates is likely to occur. Similarly this will occur for retail assets, which had already started to be seen, prior to any influence from COVID-19. This will likely particularly apply to those heavily exposed to tenants aimed at discretionary spending. The reletting and vacancy risk will be certainly priced into an investment decision.

What we can expect to see is a greater disparity of yields between prime and secondary stock. This was evident 5-10 years ago where there was 200-300bp difference in yields. That gap narrowed in 2018/19 and there was almost no difference between asset classes due to high demand and the lack of available stock with investors chasing return.

Tourism and education assets are likely to have already experienced the immediate impacts of travel bans and will face a long recovery period. These assets may initially be viewed by some as having more of a cashflow crisis than a significant change in cap rates, however the uncertainty of the duration of the crisis will likely mean risk is priced in and inevitably a rerating of these assets will occur.

Land and development assets are likely to exhibit the most significant value volatility. Unemployment levels and lack of consumer confidence may see these assets to be the most dramatically discounted, akin to the post GFC environment.

Volatility in commercial property markets tends to be less observed as owners (other than distressed owners) tend to hold and liquidity naturally reduces during recessionary times.

Owners of prime assets, especially those in Australia, have modest gearing and so transactions that do occur will tend to relate to poorer quality assets and this can further skew data available within poor market conditions. It is likely that banks will be more careful about their lending decisions, which means cashed up purchasers are more likely to be present in the market who will demand a higher return on equity.

Time will tell whether there are a number of ‘forced sales’, noting that if this type of transaction regularly occurs, these transactions can tend to become the market expectation for pricing.

What will the long term impacts be?

Following the GFC, a flight to quality was observed in the demand for property assets. The COVID-19 crisis could result in structural changes to how the real estate market evaluates tenants in terms of risk, noting that occupiers providing essential services diversify risk under these circumstances and tenants offering essential services may be considered to offer a robust covenant.

Assets with a diversified income, including government and essential services tenants, and a broader spread of tenant type are likely to be sought after. We may see the change of use of some more secondary assets to a higher and better use.

Other decisions around property may include sale and leaseback arrangements becoming more prevalent as businesses seek to improve cashflow, their balance sheet and reinvest capital in their businesses.

Assets with direct exposure to offshore visitors such as tourism will likely reveal, at least for the medium term, structural repricing. In terms of occupier demand, tenants may not necessarily demand lower rents, but will look to be more efficient with their space requirements. Tenants are likely to realize efficiencies in terms of space requirements following adapting to working from home and similar arrangements. A reduction of floor space may occur as tenants who have evolved to utilize digital technology over this hibernation period, look to reduce nonessential spaces that were previously utilised for group gatherings and functions. We may see renegotiating and restructuring of leases and an emphasis on a healthy and hygienic environment in the office sector.

In the industrial market, occupiers involved in key supply chain activity will be more highly sought after, whereas businesses reliant on offshore demand will be less sought after.

Retail is likely to face a challenging recovery period as confidence needs to rebuild amongst households. Job losses, job security and uncertainty may cause more people to save or pay down debt which will further increase the period of recovery. Some retailers may use the hibernation period as an opportunity to permanently shut down underperforming stores and restructure their operations following having to adapt to an online platform. It will be interesting to see how food and beverage retailers recover from social distancing and the impact their struggle has on retail assets as they have represented a large proportion of lettable area within centres.

Overall a challenging reletting market is likely to occur coupled with expectations of incentives. We may see new clauses drafted by the legal profession to cover similar events providing more flexibility for the tenants in times of significant uncertainty.

How are valuers going to approach COVID-19?

Valuers are required to report at a specific date and reflect market conditions at that time. Events such as COVID-19 create valuation uncertainty, because the only inputs and metrics available for the valuation are likely to relate to the market before the event occurred and the impact of the event on prices will not be known until the market has stabilized.

Currently, there is no way of confirming the movement through transaction data as yet and valuers will need to rely on all information available to them when they complete and submit their market value assessments. Valuers can reflect, for example, historical evidence that suggests how property markets might move under differing economic, monetary and fiscal conditions.

Expect valuers completing valuations during the COVID-19 crisis to:

  • caveat their advice, referencing some of the issues outlined above
  • reference the high valuation uncertainty, and that there is more downside than upside value estimation error
  • reserve the right to reconsider their advice as events unfold and if these events are likely to have a material impact on value. This might extend to valuers recommending that they review their advice prior to the next financial reporting date and as market evidence occurs. More regular valuation reporting will likely be needed to keep advice up to date.

Valuers will have to estimate the appropriate discount and/or capitalisation rate to apply for their analysis. When markets are stressed, valuers will need to consider issues such as the need for liquidity premiums and whether it is appropriate to consider additional risk premiums to account for the greater degree of uncertainty in estimating cash flows. Care will need to be taken in deciding on the appropriate level of additional risk premia and significant judgement will be required. We would recommend that the reasoning for any additional premia is documented within valuation reports to provide transparency.

The Australian Property Institute suggested that its members utilise the following disclaimer:

The outbreak of the Novel Coronavirus (COVID-19) was declared as a ‘Global Pandemic’ by the World Health Organisation on 11 March 2020. We have seen global financial markets and travel restrictions and recommendations being implemented by many countries, including Australia. The real estate market is being impacted by the uncertainty that the COVID-19 outbreak has caused. Market conditions are changing daily at present.

As at the date of valuation we consider that there is a significant market uncertainty. This valuation is current at the date of valuation only. The value assessed herein may change significantly and unexpectedly over a relatively short period of time (including as a result of factors that the Valuer could not reasonably have been aware of as at the date of valuation). We do not accept responsibility or liability for any losses arising from such subsequent changes in value. Given the valuation uncertainty noted, we recommend that the user(s) of this report review this valuation periodically.

Meanwhile, The Royal Institute of Chartered Surveyors (RICS), which provides global guidance to valuers, suggests on their website (as at 29 March 2020) that its members consider advising their clients that they:

“… attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.”; and

report their valuations “on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to [our] valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review.”

Notwithstanding the above, valuers will need to advance their thinking on how they structure their valuation reports to ensure they communicate their opinions and assumptions in a way that assists their clients with evaluating the valuation advice and presenting it in a meaningful way to their stakeholders.

In Conclusion

Considering the likely impacts on the major assumptions of value, we suggest a softening of capitalisation rates is likely to occur across most asset classes.

We see ‘value add’ properties climbing higher up the risk curve with an emphasis placed on well leased property to secure tenants with fixed growth, such as prime assets, where capital will continue to seek diverse and secure cashflows. Australia has traditionally been favored for its transparent market and strong governance and will likely continue to attract offshore capital.

A short term effect on cashflow from discretionary type tenants and those businesses which can be called non-essential services may eventuate. Pricing in for risk of vacancy and letting up allowances is likely to occur.

The recovery time for tourism and retail assets will depend on the duration of the crisis. The longer it goes on, the longer the recovery time will likely be, as unemployment and uncertainty perpetuate and households move to saving and paying down debt.

Valuers will include new disclaimers and utilise evidence available to them at the time and should ensure to articulate fully their assumptions and opinions. Valuers should be open to having transparent dialogues with clients and their auditors as this crisis evolves. Their advice may require more regular updating, noting as more transactions occur throughout the crisis these will reveal how the market is responding.

-PWC

Important Coronavirus Update for Renters

If you are a renter, you may have heard that your landlord can skip their home loan repayments.

Unfortunately, this is not accurate.

Anyone with a mortgage, if they are experiencing financial hardship, can only delay their home loan repayments, but they still have to pay them in full.

In fact, when a property owner delays their home loan repayments, they end up paying more. This is because the lender still charges the full interest and fees over the delayed period, then they charge interest on top of this accrued interest.

The equivalent would be a tenant delaying paying their rent for a few months, but then having to catch up all the missed payments plus compounding interest on the delayed amount, plus pay the new rent at the same time.

As much as we would like it to be true, lenders always still charge interest, and the longer a loan is delayed the more it costs.

This misunderstanding is causing some renters to feel they are unfairly paying rent when their landlord is getting some kind of holiday from their home loan, but this is definitely not the case.