OPINION: Values of a registered valuation
(Takapuna commercial property scene) A shift in credit lending criteria by the major banks has put a new focus on commercial property valuations. Photo / Supplied
Commercial property investors risk financial woes if they fail to obtain a registered valuation before they buy, Bayleys valuation directors Nick Thacker and Carl Waalkens warn.
“There will be those that view a valuation report as an unwanted and unnecessary expense, but it provides potential buyers with a better understanding of the current and potential value of a property, enabling them to make smarter financial decisions and to understand and manage value risks effectively,” Thacker says.
“Being unaware of the value of a commercial property asset, or having an unrealistic opinion of it, can lead to major issues down the line, particularly when it comes to seeking bank funding for the property.
“A detailed valuation will help purchasers in their finance negotiations – at the very least it shows the banks they have done their research on the property.”
Waalkens says the shift in credit lending criteria by the major banks has put new focus on valuations, with finance, in many cases, hinging on the findings of a valuation report.
“For veteran commercial property investors, stricter requirements are unlikely to be an issue, but those new to the market may not be aware of the influence a valuation can have on their finance prospects and how it can limit the possibility of post-transaction surprises,” he says.
“The major retail banks are focussed on matters that could affect their return and the value and enforceability of their security. There is much more emphasis on minimising risk, and the thresholds that need to be met to obtain funding have lifted.
“In a market where lenders are being more selective about the projects they finance, it is essential for borrowers to demonstrate to lenders that they are mindful of the banks’ changing appetite to risk.”
Bayleys Valuations Ltd directors Nick Thacker (left) and Carl Waalkens. Photo / Supplied
Thacker says the banks won't lend money unless they have a valuation to rely upon. “It's that simple. Those who have bought commercial property before know that it’s a crucial component of a commercial property transaction.
“However, it’s not uncommon for first-time buyers or buyers who are new to New Zealand to be unaware of the rules and regulations. It's amazing how many phone calls we get from people who tell us, ‘We're settling in a week; can I get a valuation?’”
“Buyers need to engage a registered valuer well before the property they hope to acquire goes to auction or they could face difficulties securing finance. Sometimes the numbers don’t stack up.
“There have been instances where banks have point-blank refused to finance purchases because buyers have left it too late. This has forced buyers to seek finance from mezzanine lenders or family members to try and settle their properties.”
The most recent commercial and industrial property cycle boom has seen many of New Zealand’s larger property-owning entities, including Precinct Properties, Goodman Property Trust, AMP and Augusta, all upping the size of their portfolios.
Those enlarged portfolios have subsequently demanded a greater degree of valuation services, whether for financial and shareholder reporting, insurance purposes or refinancing. With several more years of construction work already in the building pipeline, particularly in Auckland, the need for valuation services at the very top end of the value chain is forecast to remain strong.
“In terms of finance, the banks are a lot stricter than they were before. That has had an effect on investors who had previously been able to leverage their assets - their equity doesn't go as far as it used to. Valuation reports aren't simply a means to getting finance – they help investors gauge whether a deal is worth it,” Waalkens says.
“It’s also critical that buyers hire only registered valuers. The banks have an approved panel of valuers, of which Bayleys Valuations is one. Valuations provided by non-panel members will be rejected, which means purchasers will have wasted thousands of dollars on a useless report and wasted valuable time.”