Bank Valuations erring on the side of caution - Does it affect market perception?

Posted On Thursday, 25 June 2009 02:00 Published by
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It is common knowledge that local as well as international banks have tightened their lending criteria over the last year or so making it harder to conclude sales of fixed property

What is more concerning, however, is that some banks are trying so hard to combat the potential of future negative equity that they run the risk of skewing the markets perception of fair value.

We have recently attempted to facilitate a deal between a willing buyer and a willing seller for the sale of a 1000m2 A Grade commercial property in the Parktown area of Johannesburg. We had a signed and accepted offer to purchase at R12.6m. The purchaser had provided guarantees for 30% of the purchaser price and had a bond approved for the remainder of the purchase price. At the last minute the bank received their internal valuation at R8.5m. We immediately questioned their valuation only to find out that they would only value the property on the income approach method, which in principle is fine, except that their perception of a fair market rental was R80/m2 which is considerably lower than the R110/m2 we are achieving in the same area for similar properties.

Considering that the premises was being purchased by an owner occupier, we requested the bank to utilise the depreciated replacement cost method but they flat out refused. This is disturbing in the fact that the potential purchaser could not build the premises for the agreed sale price even if it were possible to purchase land in the area as well as the purchaser being more than qualified to service the bond repayments.

The result has been that the low bank valuation has now effected the purchaser's perception of real value and even though they could have afforded to increase their cash contribution to purchase the property they have decided not to purchase the property at this time. This has left the seller with an un-sold empty bonded property and the purchaser still paying rent while at the same time looking to purchase at a price that will be very difficult to achieve given that high replacement costs of similar properties.

Finally, we find it strange that the bank requires a property which they have valued at R8.5m to still be insured for R14m.

Food for thought.

Publisher: eProp
Source: Galetti

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