Valuation in time of economic crisis<\/p>\n
By Willson Kalip<\/p>\n
JAKARTA (JP): We have all witnessed and experienced the
\ndramatic changes over the past one year. These changes involved a
\ndrastic economic downturn created by a sharp depreciation of the
\nrupiah, political and social turbulence, and a change in the
\nleadership of the country. These changes have affected everyone,
\nin all walks of life.<\/p>\n
In this economic crisis, demand for all property types has
\nshrunk drastically. The degree of this negative impact on
\nproperty depends greatly on its location and the property type.
\nNew supply has been put on hold for years to come, and projects
\nunder construction have finally come to a stop after months of
\nstruggling.<\/p>\n
With huge outstanding loans exposed directly or indirectly to
\nthe property sector, bankers and developers, and even government
\nagencies, are wondering what the capital value of these
\nproperties are. Cash-rich foreign and local investors are
\nmonitoring closely from time to time the capital value of
\nproperties they are eying. This group of investors is hoping to
\npick up some strategically located properties at reduced prices
\nwhich reflect a higher risk and an expected longer holding
\nperiod.<\/p>\n
So what is the capital value of real properties today? It is,
\nindeed, a difficult question for many, given the current market
\nconditions. Why?<\/p>\n
First, we have to understand the uniqueness of the dual
\ncurrency system adopted in real properties transactions (both
\nrental and sales) here prior to the crisis. Prior to the crisis,
\nprime office and retail space was leased and sold mainly in U.S.
\ndollars. Today, given the sharp depreciation of the rupiah
\nagainst the dollar, we are witnessing a stronger trend of dollar
\nrental payments being converted to rupiah payments either through
\nan outright change to rupiah, or in some form of pegging, at
\nhistorical exchange rates. Again, the historical rates adopted
\nvary, depending on property type and location.<\/p>\n
However, one should be mindful that such transactions are only
\nreflective of the market and exchange rate situations then. On
\nthe other hand, there is, currently, about 20 percent of prime
\noffice buildings still receiving pure dollar rental income with a
\nreduction made to the rental rates. With the recent strengthening
\nof the rupiah and its continued volatility, one should not
\nconclude immediately that the market rental trend in the future
\nwill be one that is rupiah-based. We have also witnessed a
\ncombination of sales transactions and offerings from prospective
\nbuyers in both rupiah and dollar terms. With the strengthening of
\nthe rupiah, prospective buyers who had offered in rupiah are now
\nwithdrawing their previous offering prices. This currency
\nvolatility has indeed made investment decisions difficult and
\nuncertain.<\/p>\n
Second, the absence of quality sales comparables. Over the
\npast one year, the market has not witnessed many en bloc
\ntransactions. Hence, making the adoption of the Direct Sales
\nComparison Method of valuation (the best approach to valuation)
\npractically very difficult.<\/p>\n
Investors in today's market are interested mainly in
\nproperties that offer a discount from their current replacement
\ncost. Discounted Cash flow Method would serve to provide guidance
\nto property value subject to sufficient analysis and research.
\nAll key assumptions adopted should be made known to the client.
\nHowever, with market intelligence available on strata-titled
\nsales transactions, and current serious negotiations on some of
\nthe real properties deals, a valuer would still be guided in his
\nvaluation in this market condition.<\/p>\n
A valuer should be independent and unbiased in testifying and
\nreporting the capital value of real properties based on the
\ncurrent market situation. The market is moving in tandem to
\nchanges in the economy, political and social arena and currency
\nfluctuation (which has yet to stabilize). Hence, a valuer should
\nalways be up to date on the current market movements.<\/p>\n
A valuer must report to the best of his knowledge at the time
\nof his valuation. The consumer of such valuation reports must be
\nclearly informed on the basis of valuation, the market evidence
\nadopted in the analysis, all assumptions made and the valuer's
\nfinal valuation judgments. Upon client's requirements, the
\nreports are to be updated periodically to reflect the continuous
\nmarket movements.<\/p>\n
A valuer should not and must not dictate the capital value of
\nreal properties. Capital value of real properties should only be
\ndetermined by market forces based on supply and demand factors.<\/p>\n
The writer is the valuation director of PT Procon Indah\/Jones
\nLang Wootton, Jakarta.<\/p>",
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