Everyone knows that site values have crashed – but how do you establish the true worth of sites and buildings in a dormant market?

THE ACCURACY of valuations is beginning to rear its head again as developers and bankers squabble over the true worth of sites and buildings in a dormant market.

While there has been some criticism of the banks for not having their own valuers in place when they handed out billions to fund new development sites and investment properties, the problem was not after all with the valuations but with the way in which the various banks competed with each other to dish out debt finance to virtually all comers.

As we all know now, the competition between developers and syndicates pushed land prices steadily up over a full 10-year period until the middle of 2007.

At the same time house prices were rising annually by anything from 10 to 20 per cent and, in the madness, most of the extra money generated by the sales ended up in the pockets of the landowners rather than the builders.

“With so many people having access to debt finance, everybody was a property expert. The money empowered them and they thought they were on a roll like Bill Gates,” says one valuer.

The driving force was the debt finance which was the single most important factor in determining property values; as we now know, without debt finance there is no market.

The guys unfortunate enough to have acquired sites towards the end of the buying spree – particularly land with no planning permission – have been well and truly caught out.

The money invested in the sites has been lost and they are heavily indebted to their banks.

And if that is not bad enough, this episode is being played out at a time when salaries and bonuses are being cut and the day job is possibly on the line.

The general consensus is that sites in the Dublin area have fallen in value by up to 50 per cent while those in provincial towns and villages may have slipped by anything up to 70 or 75 per cent. A full scale crash, nothing less.

Some of those with toxic debts are naturally questioning the scale of the write-down in values, arguing that in the absence of a functioning market – with few or no willing buyers and sellers – it is well nigh impossible to give an accurate market valuation.

Distressed vendors selling into this dreadful market can expect to take a major hit. But sell they frequently must, even at well below the nominal book value, in order to generate cash.

Could another seller get a higher price if he was not selling under duress? Almost certainly yes.

It is here that the problem arises for many vendors. The present illiquidity undermines the market and distorts values. But once there is more than one bidder then there is a market; similarly, once a valuer can pinpoint a comparable valuation they are in business.

Presumably some of our valuers do the same as their counterparts in the UK and use caveats over the accuracy of their valuations. In other words, kicking for touch.

Can’t blame them, especially as there is little or no evidence of sales proceeding in the present ghastly environment.

Everyone wants to see the market reactivated but first of all banks need to know if loans are in breach, and if so by how much, before they can take action. Then they might start moving the bad loans over to a separate organisation, as suggested by property expert Dr Peter Bacon. The sooner this happens the better.

Another major figure, Tom Costello of Sisk, has suggested that by the time the present problems are sorted out, the property industry will be about half its former size. In other words, no need for so many construction workers, architects, quantity surveyors, estate agents . . . even property journalists. A sobering thought which might not be too wide of the mark.