I own a cracking commercial property in Brisbane, but I'm very frustrated at how much equity I'm having to leave tied up in it due to low valuations. Extensive consultation and research tells me that it would be reasonable to put it on the market around the $1.7M mark, and that you'd be confident at getting $1.5M "any day of the week". (Net Profit $120K in postcode 4000.)
Yet I've had two commercial valuations the past few months, both of which originally came in at $1.15M
, and upon protest from both myself (AND the lender!) revised upwards to $1.3M. (One wonders if they knew each of each other's valuation?) At either $1.15 or $1.3M, I reckon I could just about sell it for cash within the hour!Having the valuation come in at a more reasonable $1.5M would release more funds for me to use as deposits on further investments. I'm most frustrated because I have excess borrowing capacity and have deals I want to do; it's free equity I'm low on right now.
Any tips on getting commercial valuers to provide a valuation that at least somewhat bears a resemblance to market valuation?
Warmest regards, and thanks in anticipation for your wisdom
,Tracey in Brisbane
PS Happy New Year!
Happy NY Tracey.
Firstly, what do you mean by market valuation? Is this what an agent has told you the property is worth? That is not MV.
Sure, a tighening of the yield from 9.2% to 8% might sound fair however the valuers have taken into a number of considerations in preparing their assessments (and these would have been listed in their valuation). I hasten to add, although many properties do sell at less than a 7% nett yield (cap value of $1.7M+, it would be grossly inappropriate for the valuer to put such a figure on the property using either the capitalisation of nett income or the summation methodology as they are bound to consider the existing tenure , vacancy rates both generally and in the local area and the likelyhood of achieving the same or greater rent at the term of the lease.
In Sydney, at least, properties let 3-5 years ago and undertaking lease renewals or vacancies are showing a 10-20% drop from current nett rent levels. Financiers have been caught out in the past by over exubrient valuations on commercial property and valuers have been hit with great increases in their PI insurances.
I would tend to agree with the vals as they have used 2 methodologies to back their valuation.
BTW they can be sued either by the banks or by yourself had they overestimated the value of the properties and a slump is to occur.
I hear what you're saying about not listening to agent's hype; my assessment is based, among other things, on having had an offer on the table recently of $1.62M. But I don't want to sell! I feel this property will be a great "core asset" in our portfolio.
I'd also point out that the lender did lend me 85% LVR of a valuation a bit higher than $1.3M, as they felt so sure that the valuers got it wrong. Presumably they wouldn't have done that if they felt that the valuations were correct?
I hear your point about valuers and indemnity; I don't want a ridiculous valuation, I want a fair valuation. Even if they'd said $1.4M and then been "squeezed" to $1.5M, I'd understand – but they're a very long way off the recent offer (which was on the table at the time of valuation). If your market value is $1.6M but you can only get a valuation of $1.3M, it effectively lowers the LVRs that you can get by about 20 to 25%, and that means tying up a lot more equity than I'd like.
If that's just the way it is – that commercial valuations generally are 25% less than market – then I'll just suck it up, but I wondered if there was something that I was missing.
Best wishes,
Tracey
Tracey,
It may well beworth querying both of the valuers as to why they have given the property such a high yield – does theproperty have some unrealistic risks which can be mitigated? eg asbestos roof, short rental history, poor covenants (short term/monthly leases)? Is the building old and in need of major work (this is often the case indicating a high yield)?
What is the vacancy rate in the area? Has this skewed the valuers' opinions? Has the market or any other factor changed recently of which the valuers may not have been aware?
Having investigated many industrial sites located in regional areas (Hunter/Bathurst/Orange/Wagga etc) over the past few months, I have found very few suitable properties yielding more than 7.5% on a fully let basis (but these sites were in NSW) and mostly asking $2.5M+. Most of the smaller sites in Sydney sell on a much tighter yield (sub 6%). I too will consider taking this one off your hands at such an attractive yield.
So without more information about the state of the current Brisbane industrial market, I couldn't comment much further.
Regards
SNM
Good morning, SNM.
The building was fully refurbished prior to the revaluation and was the reason for it; I wanted to pull out some of the money I'd ploughed in. It had new plumbing, new wiring, repaint throughout, new flooring, new kitchens and bathrooms – just the walls still standing really! Leases are only 6 months but this is standard in this niche (multi-tenancy, ie boarding house/student accommodation) and other properties in the surrounding streets are being capitalised at about 6 or 7% net. (Several recent sales.) The vacancy rate of mine and similar properties is near zero, and there are no other "problems" like asbestos or anything that I can think of.
When I questioned the valuer(s) on all these points, they simply said vague things like "uncertainty re election" (this was in October), "difficulty of finding comparables", etc. One of the few comparables that they did use was a hotel in the suburbs, which is a ridiculous comparison to long-term accommodation in the CBD! I think they were just being very conservative and concerned about covering themselves.
As you highlight, I think it's a cracking investment, and if it's really only worth $1.3M then at least I can console myself that it's yielding nearly 10% NET! And I only bought it a year ago (purchase plus renos and holding costs about $1.05M), so either way I'm a happy girl
I think I'll just have to focus on "no money down" deals for the next year or so, then get a new valuation with a longer history operating and see if I can pull out more equity at that time.I was just disappointed that my fabulous investment wasn't "even more fabulous" by allowing me to NOT ONLY pull out all invested equity immediately (which I've achieved), but also allow me to have extra free equity for the next project. But one mustn't be too greedy…
Actually, the more I look at it, the better I'm feeling! I have no equity tied up in the property, I have an ongoing income stream that's currently slightly cashflow positive (because I'm so highly geared, I'll only be about $30K pa cashflow positive initially), and I get capital growth on a CBD investment currently worth "somewhere around $1.5M-ish".
So I'll shut up now before people start hurling objects at me Now, let's see if I can repeat in 2008….
Best wishes to you,
Tracey
Thanks Tracey for the further info, I too would have applied a higher yield like the other two valuers. I did recently note the conclusion of a sale of a boarding house in Sydney prior to Christmas, well located etc but with an 8-9% yield also (refer Saturday Business SMH (commercial property section – deals) Dec 07 – sorry can't be more specific). There was also another recent article regards a Sydney developer being allowed to demolish a Boarding House (loss of low cost housing).
The yields I referred to were more of an industrial nature not multi-tenant residential. As you would be aware, yields do vary between property sectors and within each sector eg high tech industrial vs light industrial, units vs housing, strata shops vs shopping centres etc.
Yield would have been marked up for it's restriction to provide for low-cost housing as well. These are great cashflow investments however there is little incentive for the owner to undertake any improvements as the growth in rent is negligible.
Depending upon the restrictions placed on BH in Brisbane City, are there possibilities of this site being valued as a development site and losing its boarding house status? This will return a much lower cap rate and release some funding.
SNM, the property is actually residential with a permission for multi-tenancy (material change of use approval), but no obligation to leave in current configuration (which is actually luxury student accommodation, not budget accommodation for the "otherwise homeless") and it has previously been a family home (albeit a very large one, with 16 bedrooms!). The comparables I referred to were also multi-tenancies, within a block of my property, which sold mid-07 at prices equating to a 5.5-7% net return. But I'm realising as I say it that the fact that these other multi-tenancies WERE budget accommodation means that it's probably reasonable for them to have a lower yield. I'm getting double the rent per room that they are (because each of my rooms has air-con, fully furnished with brand new furniture, broadband, phone, LCD TV/DVD/Foxtel, etc) but that doesn't necessarily mean that my property is worth anywhere near twice as much. I'm beginning to see things from the valuer's perspective a bit more as I think this through. There really is nothing comparable to my property in the local market – which is why I decided to target this market – but it does make it challenging from a valuation perspective.
Anyway, the idea I'm getting is that because of the niche market that I'm operating in, it's going to be difficult to get a higher valuation even if the market would pay more, so I'll continue with the strategy I outlined previously.
There's no opportunity at this point to demolish because it's in an area of "character" housing, but the rules here are if you're in less than a group of three houses together, then the character listing is lifted. I'm in the middle of a group of 5, so if any one of the 5 houses either burn down or get permission to demolish, my character listing is lifted. The chances of that happening in the 20 years or so that are my timeframe, are reasonable, I reckon. (And no, I'm NOT an arsonist!)
Best wishes, and thanks for your insights,
Tracey
Hi Tracey.
Assuming the valuer agrees with the $120K nett return, and that return has existed for a long enough period,
then there must be some reasons in the written valuation stating
how the valuer reached a figure below the capitalisation rate you were expecting.
That’s not to say the stated reasons are correct.
BTW, what is the general cap rate the valuer was using for your type of property ?
Does that cap rate compare with properties of similar use in other geographical areas ?
Has the valuer valued this type of property elsewhere where this type of property is more prevalent like near a university ?
I share your frustration when excessively tough LVR’s lock up too much capital or equity and delay expansion plans.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
thecrest, this thread is almost 4 years old.
OMG. Didn’t notice. Picked it out of the active posts list. Duh.
Oh well, more typing practice.
Thanks for the heads up.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
, and upon protest from both myself (AND the lender!) revised upwards to $1.3M. (One wonders if they knew each of each other's valuation?) At either $1.15 or $1.3M, I reckon I could just about sell it for cash within the hour!
,
I think I'll just have to focus on "no money down" deals for the next year or so, then get a new valuation with a longer history operating and see if I can pull out more equity at that time.
So I'll shut up now before people start hurling objects at me 
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