Market Confidence: A Crucial Factor in Property Valuations

Recent market analysis suggests that office and shopping center values may experience a slight decrease, potentially impacting other sectors of the property market. However, the property market is quite resilient due to a strengthening in gross effective office rents and an increase in sales for retail rents, which is contributing to the overall net income of the property market. In the absence of sales, valuers do not have sufficient evidence to determine the prevailing cap rates or market levels, which may lead to a decline in property valuations.

While several property owning AREITs are trading at a discount to net asset backing, this could be an indication of the current market sentiment towards property valuations. However, there are no prohibitions for valuers to reduce a property's valuation for financial statement purposes based on their assessment of the market levels and appropriate capitalization rates.

To determine the current view on value levels and cap rates for various property sectors, the API's guidance paper suggests conducting qualitative research using an appropriate sample, a standard questionnaire, and careful analysis of the findings. This research can yield nuanced results, as seen in the 2020 revaluation of non-residential land in NSW. By involving owners, managers, valuers, auditors, and relevant stakeholders, we can build confidence in the conclusions and reset the valuation program accordingly.

Based on historical data, it is unlikely that all properties in a portfolio will experience a significant drop in value. The performance will vary depending on factors such as net income and buyer demand in different sectors. Additionally, the net asset backing (NAB) of each AREIT may not completely match the current trading price but may get closer to it over time, and the trading price could eventually rise as the market regains confidence in the valuations of non-current assets listed in the AREIT's financial statements.

In conclusion, while there are concerns regarding a potential decrease in property values, there are also positive indicators of the property market's resilience. By conducting research and involving relevant stakeholders, we can gain a better understanding of the current market sentiment towards property valuations and take appropriate action to reset our valuation program.

Source: (https://www.rba.gov.au/publications/fsr/2023/apr/australian-financial-system.html)