Interest Rates, Inflation and the impact on Commercial Real Estate – what should you pay attention to?
Part 1: The Interplay of rates, inflation and real estate On the first Tuesday of November at around 2.30pm each...
As a commercial real estate fund manager, Corval Avenue recognises that it is critical to understand the value of the underlying property that is held as security. In fact, as an asset lender it is absolutely fundamental we get this part of the process right! How do we do it, what’s important and where are common mistakes made? Let’s dive in and find out.
What’s Involved?
A marketing campaign and auction is the most definitive reflection of asset value… unfortunately, it is rarely possible to run a sale campaign prior to making a commercial real estate loan. So how do we establish the value of a property?
The market accepted approach is via a property valuation from a recognized and appropriately qualified property valuer. Valuers have commonly accepted methodologies for determining value – for example comparable sales, discounted cash flow, capitalization, summation and so forth. However valuation is not an exact science and the reports naturally contain a degree of subjectivity reflective of the individual/s undertaking the analysis.
So, how do we have confidence in the values of the properties we look to take as security?
Corval Avenue has a panel of trusted and independent valuers with whom we frequently work and have had positive experiences through the life cycle of transactions and who understand the scope and depth of the analysis we will typically require to thoroughly assess an opportunity. The panel includes valuers experienced and qualified in asset sectors where we regularly lend. For example, our panel includes valuers who specialize in land subdivisions, high value residential properties and development assets. We are looking for valuers who know what they’re talking about.
What does Corval Avenue look for in a valuation?
Beyond simply providing a value, the report we receive is a treasure trove of useful information about the security asset including:
- Titling and services information
- Easement and encumbrance notations
- Environmental, bushfire and flood affectation
- Zoning and Planning permits
- Pre-sales
- Leases
- Hypothetical project feasibilities
- Project Market supply/demand and sales data
- Comparable assets
- Location, locality and surrounding developments.
We take all of the above into account when determining appetite (and specifically the Loan-to-Valuation-Ratio or LVR) for a loan opportunity before we present it to investors.
When it comes to forming a view on value, Corval Avenue hones in on:
| Comparable sales | Has there been any actual sales evidence on recent, similar properties in the geographic area? In the report, the valuer would typically provide an assessment on whether such comparable properties are inferior / superior and why. |
| Sales history (if any) for the subject property | Here we are looking for detail on sales timing and $’s expected for the specific asset/s. This information would evidence any direct market appetite for the subject asset. This kind of data is key in our analysis. |
| Market supply and demand data | This might be broad ranging information including demographics, planning and vacancy data and/or existing supply and pipeline for similar stock in the broad geography that may impact sales rates and pricing. We want to know who wants to buy the product, what is their likely demographic, is the number of buyers likely to increase/decrease or remain stable, and likely settlement timeframes. |
| Valuation assumptions | The valuer will clearly articulate any assumptions made to derive the asset value and we consider whether those assumptions are consistent with the current state of the asset and / or proposed lending structure. |
Given the inherent subjectivity in all valuations, we thoroughly review the valuation during our credit assessment process and form our own opinion as to the appropriateness of the value ascribed by the valuer. Our experience lending in different market conditions and across a range of asset types and geographies gives us confidence in our judgment on value, but the essential role an independent valuation plays in supporting that experience and judgment cannot be underestimated!
Corval Avenue Limited ACN 089 265 270 AFSL 238546 (Corval Avenue) is the responsible entity of the Corval Avenue Select Credit Fund ARSN 090 994 326
This document does not contain and should not be taken as containing any financial product advice or financial product recommendations and has been prepared without considering your objectives, financial situation or needs. Before making any decision relating to a Corval Avenue fund, you should obtain and read a copy of the product disclosure statement and target market determination, or other relevant disclosure document for that fund, and consider the appropriateness of the fund to your objectives, financial situation and needs.
Past performance is not a reliable indicator of future performance.
Corval Avenue does not guarantee the accuracy, reliability, or completeness of the information in this document. To the fullest extent permitted by law, Corval Avenue, its group companies, and their directors, officers, employees, consultants, and agents disclaim all liability for any direct or indirect loss or damage arising from the use of this document. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed.
