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There has been much excitement surrounding the recent prices attained for commercial property, chiefly at auction but also through private treaty sales. Almost all commercial property types have set record prices, especially those in the industrial and office sectors.  Many market reporters are quick to justify these prices as premium, above market value. This is often to the detriment of financers, investors and owner occupiers alike, when pre-sale finance valuations don’t meet selling prices reached on auction. 

With the bulk of the commercial property market using auctions as a platform to trade, this method of sale has evolved to become the absolute mouthpiece of the market. Auctions are a transparent environment which allow for the monitoring of prices and initial yields.  An analysis of pre-sale values determined prior to auction by various valuation suppliers (in private practice or institutional departments) show that they are falling well short of actual selling prices. The most recent example involved a typical historic office block in the Cape Town CBD which was sold by Auction Alliance for 46% above its pre-sale valuation.  According to Gavin Adie, an experienced Cape-based property valuer and adviser to the Alliance Group, market reporters appear to be incorrectly over-stating the initial yields accepted by typical investors or owner occupiers and this is impacting on the capitalization rates applied by valuers.

Initial yields are difficult to source, thus making it difficult for valuers to justify their applied capitalization rates on valuations commissioned by institutional lenders.  There are numerous sources which offer weighted results that are deduced from a portfolio of listed properties, but how comparable these tightly held prime properties are to the bulk of the stock that institutions finance is uncertain. Further to this, valuers need to justify their capitalization rates by identifying yields on specific properties and drawing comparisons to their subject. Available resources cannot do this for confidentiality reasons.