Valuation in time of economic crisis

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.