- Monday, 28 November 2011 09:02
Written by Mike Phipps, Phipps Finance
Article Read: 1275
I guess we all have somewhere special we like to go just to disconnect from the everyday and try to regain some sanity.
For many it's a favourite holiday destination or a location connected with fond memories and family fun. I'm sure that for many people the reasons that a particular location resonates may be almost intangible or hidden in some long lost experience just outside memory's grasp. I suspect that as life gets more and more complicated there will be an increasing desire by people of a certain age to spend time in locations linked to memories, not technology and modern amenities. That's certainly the case for me.
My favourite getaway place is not some five-star resort or extreme adventure location. It's not a spot with myriad shopping and dining options, fast cars and beautiful people (other than my good lady wife of course). It's Lake Somerset in South East Queensland. Created by the construction of Somerset Dam, the lake's been there since 1953 and is still one of the best kept secrets around. It's a place of great natural beauty and bugger all else. We've water skied there for years and grown to love the place.
The original Somerset Village was created to house the workers building the dam and upon completion was destined to be deserted with the buildings removed to other locations. Some were moved but the majority have stayed and the village has gradually been taken over by people who use the cottages as holiday houses with a ski boat garage attached. There's almost no permanent population save for a few retirees and the operators of the general store.
Anyway, given these uncertain economic times, declining property values and no end in sight we decided now was a perfect time to buy a holiday house in a deserted village that no one's ever heard of. So we did.
Of course, we needed to borrow the money and that meant having our other properties valued. We did what all borrowers do and estimated the values as high as we dared and waited on the result. To no great surprise none came in at my estimates although all but one fell within a range that seemed acceptable. I rang the valuer to have a chat about the one low ball valuation and was surprised when he thanked me for not being abusive.
Seems borrowers do not take kindly to bad news. We had a very cordial chat about the market and whether I had lost my mind buying a house on emotion rather than return. Turns out the valuer thinks the Somerset Village market is a bit unique and the price I was paying stacked up just fine. However, the valuer's statistics and comparable sales clearly show that I've taken a hit on another property I have in South East Queensland. And that's the one that valued low.
Sadly the market for that asset is down although I can hardly blame the valuer. The market sales are clear and he's simply interpreting that evidence. Yes, I suspect a few of the comparisons are stressed sales but that's the nature of the market we find ourselves in. It's a simple point that seems to be lost on many within the accommodation sector.
Valuers simply do not determine a market, they interpret sales evidence, economic trends and buyer demand and attempt to come up with a number. The key data is based around comparable sales evidence.
I am constantly amazed by comments from industry professionals, particular in sales, that seem to reflect some expectation that valuers pick a number based on personal taste or a disconnected idea of what they think the market should be. Nothing could be further from the truth.
Valuers are, by and large, instructed by lenders and they simply must justify the outcomes of their reports in empirical terms. That means comparable sales evidence and detailed financial analysis. Just because a punter decides to pay over the odds for an asset doesn't suddenly mean the whole market has moved to that level.
A valuer needs to see and be able to analyse a trend over multiple sales in order to justify a material shift in market sentiment for a particular asset class. The real challenge at present is that there a precious few recent sales within the accommodation sector for valuers to use as comparisons. As a result we are seeing more valuations with older sales as comparisons or comparisons with arguably non comparable buildings. Don't blame the valuers, there simply aren't enough recent comparable sales in many cases to form a clear view of the present market.
Let's not forget that when the market was going gangbusters a few years back, valuers were under enormous pressure to value multiples at 6 times plus and some of the more astute among them decided to be a little circumspect in terms of values. They saw the upward trends as unsustainable and told the market so. Turns out they were right.
I think it's also worth noting that banks don't tell valuers what to put in their reports. Yes, a lender instructs the valuer and asks that specific matters be commented on within the report. However, it's up to the valuer to determine the most appropriate valuation methodology, comparative sales and final numbers.
Banks don't have some mysterious multiple or yield range policy outside which they don't lend. If the valuer says it's worth the money then the bank will lend on the numbers within the report, it's that simple.
If you disagree with anything I've written please feel free to write to me care of the Somerset General Store. We have no phone, no mobile reception and no Internet. It's heaven!