Arriving at the right market value

Valuations underpin nearly every financial decision we make, from home mortgages and investments to corporate finance transactions, company accounts and stock market listings. In the UAE it is imperative to have a common valuation qualification that is trusted and recognizable around the world as clients are diverse. Like all chartered surveyors, guidance around valuation is provided by the Royal Institu tion of Chartered Surveyors (Rics). In the UAE, much like in Europe, it is mandatory that a chartered surveyor is a registered valuer. This ensures a consistent approach and reduces ambiguities.

Perhaps the most common purpose of a valuation is to provide a market value of an asset. When looking at calculating the market value it is imperative to look at the type of asset and how these assets are considered in the market. For instance, an office building that is leased to a number of tenants would be at a different value to the same office building that was vacant, as the investor in this instance is acquiring the income. The strength and security of this income is also to be taken into consideration as the risk needs to be factored in.

However, there are several challenges when undertaking valuations. Firstly, a lack of understanding of the process or purpose of the valuation methodology, in particular around differences between perceived values, worth and cost. Secondly, a lack of transparent primary data for comparable benchmarking. Valuations do, however, rely on the valuer's expertise to adjust market information to apply to the subject being valued whether it be rents, costs, investment returns and construction timings or leasing or sales and expected profit rates.

Slight differences can bring about variances in the end value. The mechanisms and methodologies used are robust and the differences should only occur and be supported based on input adjustments rather than changes to a methodology.

For example, traditionally every year many large accounting and audit firms engage with their clients or valuers to ensure there is sufficient time to value the assets prior to the year end and guarantee any discussions are closed or accounts signed off. The valuation methodology is aligned with the requirements for financial reporting, as such from a methodology standpoint there is a common understanding—often discussions are around the inputs and market forces rather than the methodologies.

Understanding the valuation process requires thorough due diligence and site inspections. It is not always possible to value an asset from an armchair.

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Source: Simon Townsend, Special to Property WeeklyPW

The author is a Rics-registered valuer and Head of Valuations UAE at CBRE Middle East


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