Valuation in time of economic crisis

By Willson Kalip

JAKARTA (JP): We have all witnessed and experienced the dramatic changes over the past one year. These changes involved a drastic economic downturn created by a sharp depreciation of the rupiah, political and social turbulence, and a change in the leadership of the country. These changes have affected everyone, in all walks of life.

In this economic crisis, demand for all property types has shrunk drastically. The degree of this negative impact on property depends greatly on its location and the property type. New supply has been put on hold for years to come, and projects under construction have finally come to a stop after months of struggling.

With huge outstanding loans exposed directly or indirectly to the property sector, bankers and developers, and even government agencies, are wondering what the capital value of these properties are. Cash-rich foreign and local investors are monitoring closely from time to time the capital value of properties they are eying. This group of investors is hoping to pick up some strategically located properties at reduced prices which reflect a higher risk and an expected longer holding period.

So what is the capital value of real properties today? It is, indeed, a difficult question for many, given the current market conditions. Why?

First, we have to understand the uniqueness of the dual currency system adopted in real properties transactions (both rental and sales) here prior to the crisis. Prior to the crisis, prime office and retail space was leased and sold mainly in U.S. dollars. Today, given the sharp depreciation of the rupiah against the dollar, we are witnessing a stronger trend of dollar rental payments being converted to rupiah payments either through an outright change to rupiah, or in some form of pegging, at historical exchange rates. Again, the historical rates adopted vary, depending on property type and location.

However, one should be mindful that such transactions are only reflective of the market and exchange rate situations then. On the other hand, there is, currently, about 20 percent of prime office buildings still receiving pure dollar rental income with a reduction made to the rental rates. With the recent strengthening of the rupiah and its continued volatility, one should not conclude immediately that the market rental trend in the future will be one that is rupiah-based. We have also witnessed a combination of sales transactions and offerings from prospective buyers in both rupiah and dollar terms. With the strengthening of the rupiah, prospective buyers who had offered in rupiah are now withdrawing their previous offering prices. This currency volatility has indeed made investment decisions difficult and uncertain.

Second, the absence of quality sales comparables. Over the past one year, the market has not witnessed many en bloc transactions. Hence, making the adoption of the Direct Sales Comparison Method of valuation (the best approach to valuation) practically very difficult.

Investors in today's market are interested mainly in properties that offer a discount from their current replacement cost. Discounted Cash flow Method would serve to provide guidance to property value subject to sufficient analysis and research. All key assumptions adopted should be made known to the client. However, with market intelligence available on strata-titled sales transactions, and current serious negotiations on some of the real properties deals, a valuer would still be guided in his valuation in this market condition.

A valuer should be independent and unbiased in testifying and reporting the capital value of real properties based on the current market situation. The market is moving in tandem to changes in the economy, political and social arena and currency fluctuation (which has yet to stabilize). Hence, a valuer should always be up to date on the current market movements.

A valuer must report to the best of his knowledge at the time of his valuation. The consumer of such valuation reports must be clearly informed on the basis of valuation, the market evidence adopted in the analysis, all assumptions made and the valuer's final valuation judgments. Upon client's requirements, the reports are to be updated periodically to reflect the continuous market movements.

A valuer should not and must not dictate the capital value of real properties. Capital value of real properties should only be determined by market forces based on supply and demand factors.

The writer is the valuation director of PT Procon Indah/Jones Lang Wootton, Jakarta.