Investors and lenders should look beyond face value valuation reports in a boiling market, according to alternative investment platform and private debt specialist AltX.
Over the past 12 months, Australian house prices have hit a 17-year high. According to CoreLogic’s July 2021 report, they grew 13.5% in the last fiscal year – the highest growth rate since 2004.
Historically low interest rates coupled with low housing stock, falling unemployment and high consumer confidence have pushed prices up, even during the latest closings.
But is this growth sustainable? Will the market stabilize or will prices fall? As house price growth rates finally slow down, getting it right for lenders and investors in real estate-backed transactions is critical. It can be the difference between a successful investment and the loss of hard-earned capital.
The golden loop of evaluation
It can be difficult to determine the true value of a property. Although the Australian Property Institute has developed standards for valuing real estate for loan guarantee purposes, the appraisal process can get a bit murky.
There are many different ways to assess a property, says Chris Mears, real estate research analyst at AltX.
âAn ‘as is’ assessment is based on the current condition of the property, without taking into account future developments of the building. On the other hand, an âas if completeâ appraisal assesses the value of an asset based on what it will be worth when it is renovated, rebuilt or completed. “
One appraiser might say that a four-bedroom house in Coogee, Sydney is worth $ 5 million, while another might value it at $ 6.5 million. They both follow the same guidelines, consider similar evidence, but come at very different prices. Both can justify their assessments as being “technically” correct.
But what number can lenders and investors trust? And is it important?
For example, an appraiser may have a much deeper understanding of the property or area. There may have been a recent sale to a developer on the same street, for example, which could open up a whole new market and a whole new price for the property.
Another appraiser may have a more in-depth database, which gives them a better understanding of relevant and applicable lease and capitalization rates.
Valuations are based on data from the settlement date rather than the trade date. For example, a property that was traded in August 2020 might not take hold until August 2021, during which time market conditions have changed significantly. Still, an appraiser will consider this a good comparison because the regulations are current.
With a three-month shelf life, appraisal reports are more essential in adjusting to the short-term loan market than the traditional, longer-term residential mortgage market.
That’s why lenders and investors in real estate-backed deals need to dig deeper.
âAt AltX, we want to know the real value of a property based on data, not abstract theories based on an overheating market,â says Chris. âOur own due diligence allows us to accurately determine the market estimate and assess the optimal loan to mortgage ratio. Because if the valuation is too high and you loaned the money, you have a lot to lose. But if it’s too low, you’ll likely miss the point. This is the golden loop of lending – you have to get it right.
Mears suggests that appraisal is only the first step in assessing a property’s value. There are several other factors at play.
Council briefs can provide excellent insight into what investors might be getting into.
âDevelopment requests and consents indicate whether approvals have expired or if illegal buildings are on the property,â explains Mears. Zoning is also an important indicator of the property’s development potential.
Mears says it’s important to have a good relationship with local agents who will give you time on the phone.
âRealtors are often at the heart of the asset you are reviewing and can provide useful market advice, including information that might not be publicly available,â he explains.
âThey can give you insight into specific prices and the underlying drivers of the specific market, such as target buying segment, best or worst streets, weather in market and new developments. Agents are also good at helping with comparable sales evidence and may see or know area-specific things appraisers might miss. But you also have to read between the lines, because they like to talk about prices. “
Mears says it’s also important to calculate the asset’s liquidity and its exit potential, in case investors need to release cash quickly.
âAt AltX, we make sure we have a 360-degree view of an asset before entering into a deal. Our internal evaluation team assesses and, if necessary, challenges independent evaluation reports. They chat with real estate agents, conduct site visits and review current properties on the market. They review council records, take into account the zoning, location and development potential of each property.
While some deals seem like a great opportunity, investors need to do their due diligence before getting started. And in a booming market, that matters more than ever.
AltX (www.altx.com.au) is a leading alternative investment platform in the market. Founded in 2012 and based in Sydney, AltX offers tailor-made access to alternative income-generating products that were traditionally inaccessible to individual investors. AltX has funded over $ 2 billion in transactions since its inception without any loss of investor capital.
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