Be aware of the potential value gap

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When eyeing up commercial or industrial property for sale, RV or rateable value, will be listed on the information memorandum. But just how much weight does this figure carry?

In the residential property arena, much jousting goes on between agent and prospective buyer as to the relevance between expected sale price and RV.

How much higher than RV could the sales price on that home be? Could the sales price be lower than RV for this property?

The same conversations can occur in the commercial and industrial sectors.

However, regardless of the sector, the RV is simply what it states – a figure assigned to the land and buildings for council rating purposes.

That figure’s relevance to the current market value or a registered valuation is inconsistent and, often, irrelevant. Anecdotally, the latest release of RVs in Auckland puts some commercial and industrial property around 10 percent above market values.

Agents say this is creating a disparity. Vendors’ price expectations may be pegged against a too-high RV, and inflated RVs could put potential buyers off pursuing a property.

Carl Waalkens and Paul Butchers of Bayleys Valuations distil the RV versus market value debate down to some key fundamentals.

Is rateable value the same as capital value?

Essentially, yes. Both values are the sum of the land value and the improvement value of a property.

Who compiles RVs?

RVs are undertaken on a mass appraisal basis by Quotable Value Ltd (QV) on behalf of local councils.

How are commercial/industrial RVs calculated and established?

The valuer analyses sales and value trends for an area by investigating sales data.

Once a trend is established, parameters are applied to properties within that area on an indexed, mass appraisal basis.

QV aims to ensure uniformity across a defined area, thus maintaining alignment of market values and rating liability.

For properties outside the “norm”, with special features, higher specifications and the like, value deviations are often normalised.

The freehold market property values are then independently audited by the Office of the Valuer General before being published by the local council.

RVs are assessed on a full-occupancy basis regardless of whether a property is currently tenanted.

Notional market data – not the actual lease on a property – is used for valuations for rating purposes. Chattels are not included in the RV.

Questionnaires are sent out to property owners to help establish fair market value based on active leases.

How often are they reassessed?

New RVs are produced every three years.

How does an RV differ from an insured value?

Insured value typically refers to the reinstatement cost of a building (excluding land value) based on construction prices, whereas an RV is based on market sales data and includes land and building values.

The two valuation types generally produce significantly different figures.

What is the relevance of the RV to market value?

RVs are not overly relevant to market value. As RVs are only updated every three years, they quickly become out of date.

Also, properties assessed for rating purposes are not inspected internally and baseline assumptions are just that – assumptions.

An RV may not reflect a property’s true value, particularly when occupancy is based on notional lease terms and inputs.

What factors create a “value gap” between RV and market value?

As RVs are only updated three-yearly, timing is the major contributor to
value gaps.

Additionally, baseline inputs such as notional occupancy terms give rise to discrepancies.

As properties are not typically inspected internally during the RV process, seismic upgrades, major fitouts, quality of interior work and other capital improvements are often not considered.

What general advice would you offer sellers or purchasers trying to determine a commercial or industrial property’s value?

Seek independent advice from a qualified professional.

If a vendor engages a registered valuer to provide a market assessment from the outset of a property’s sales campaign, this can assist with negotiations and help set value expectations for both parties to the transaction.

From a purchaser’s perspective, registered valuers are usually engaged post-transaction for mortgage security purposes.

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