Model for Nama property valuations not the norm
The idea of Nama determining a ‘long-term economic value’ of property is a departure from established practice by chartered surveyors
AGAINST A background of an inactive property market and discussions about the appropriate formula for pricing the transfer of property-backed loans to the National Asset Management Agency (Nama), an issue arises about concepts of valuation.
The valuation debate is of the utmost importance given the proposed establishment of Nama and the legislative basis for its operation. Concepts and methodologies of property valuation, while apparently simple, are in fact quite complex.
To understand valuation it is necessary to start by distinguishing between concepts of price, worth and value; terms that are frequently used interchangeably.
Price can be taken to mean the actual observable exchange price achieved in a market, though this can be affected by the specific and unique terms and conditions of a particular transaction.
Market prices are the evidence for valuations.
Worth is best understood as a subjective assessment of the advantages of property to a person or company based on the perceived benefits of ownership at a particular time and for a particular purpose. This may not be the same as value and can differ considerably depending on the circumstances of the person or company.
The concept of value is more problematic. There are many concepts of value. All have their positives and negatives and may well be suitable for particular purposes and assist decision-making about property. All will, however, exhibit varying degrees of uncertainty.
Conventionally, chartered surveyors undertake valuations using a “mark to market” approach. This means basing an estimation of value on analysed market transactions and an assessment of market circumstances using knowledge and experience gleaned from a close engagement with market participants.
The specific concept of market value is used when forming an opinion of the likely exchange price at a particular time prior to, or as a proxy for, a sale on the open market. The valuation is an opinion of the estimated amount for which a property should exchange on the date of the valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had acted knowledgeably and without compulsion.
Market value is a well-tried definition developed over 40 years and is set out in the Royal Institution of Chartered Surveyors valuation standards known as the Red Book, a publication that is more than 290 pages in length. It contains mandatory rules, best practice guidance and related commentary for all chartered surveyors. It was first published in 1980 following a property crash and recession in the UK. It has been continually updated and is recognised as an international standard of choice in property valuation.
Market value uses assumptions about markets, sellers and buyers to allow a rational and tested approach to valuation. In normal conditions adequate transactional and other evidence is available to allow a sufficient degree of confidence in valuations using this definition.
In time of rapid transition or in a market hiatus, such evidence may be limited or become dated rapidly, or indeed be absent for some time as we are currently experiencing, thereby leaving valuers to rely on their experience, feel for the market and professional judgment. This is basically relying on sentiment.
Sentiment is not scientific, however, and the uncertainty of valuation is inevitably increased with a resultant reduction in confidence. Nevertheless, in current conditions, to ascertain the market value of a property, the Red Bookdefinition of market value used by an experienced professional with an intimate knowledge of the market is the best way of arriving at a reasonable valuation.
It appears that it is the intention of Nama to carry out valuations in accordance with the Red Book, although the precise definition of market value is not used in the draft legislation. Chartered surveyors have, therefore, confidence in one of the parameters for establishing the transaction price for the exchange of property loans from the banks to Nama.
However, the Nama legislation also introduces a concept of “long-term economic value” and provides a definition of this which is wide and open to interpretation. This new concept is being developed as an alternative, or an addition, to “market value” to fulfil an identified purpose – which in this context is to be used as a formula to extract non-performing loans backed by property collateral from the banks. It would appear that the proposed “long-term economic value” model will use demographic, economic and financial forecast inputs as well as market value to determine a guide for what a particular property might achieve if sold on the market at the date of the transaction or indeed subsequently, under “normal” conditions.
Another important factor in this process will be the categorisation of property assets including undeveloped unzoned land, undeveloped zoned land (greenfield, brownfield, prime urban), undeveloped property with planning refusal, undeveloped property with planning permission, partially completed buildings, completed unoccupied buildings, completed partially occupied buildings, etc. It is imperative that an overall strategy and action plan is put in place for the macro management of these distressed loan assets.
The reliability of the “long-term economic value” model is difficult to assess and from a chartered surveyor’s point of view cannot be upheld as a conventional valuation.
Whether or not the development of this new model of “long-term economic value”, as set out in the draft Nama legislation, is appropriate will continue to be the subject of debate. From a chartered surveyor’s point of view, it will represent a departure from conventional valuation that has been developed and well tested over a period of 40 years.
Eoin McDermott is a chartered surveyor and chairman of the gp/valuation division of the Society of Chartered Surveyors