There has been a saying that the real estate industry is like an ecosystem, where every stakeholder - including the Government, occupiers, investors, developers, banks, professional advisors (like liquidators) and so on - work closely together, relying on each other to thrive. To maintain a healthy ecosystem and business environment, property valuation (be it for capital value or rental value) is a key connector, serving as the guiding light for all market players.
Property valuation has always played an important role in the fast-changing Hong Kong property market. Valuation principles are key in understanding how to maximise the potential of/best use of the assets no matter who the users of the valuation would be. More so now than ever before as Hong Kong faces the triple whammy of the trade war, social unrest and Covid-19 pandemic, valuation techniques remain a focal point active amid the current volatile market.
Facilitating real estate ecosystem’s development
At the core, valuation influences policy making and amendments by providing insights to the Government into land supply, land administration policy as well as implementation of redevelopment.
Lack of land supply has been a long-standing challenge for Hong Kong. One of the options to resolve this challenge is to develop brownfield sites. In Hong Kong, brownfield sites are agricultural land in the New Territories that has been converted into other uses due to the change in economic activities. They are used for open storage, port back-up facilities, logistics operations, vehicle parking, vehicle repair workshops, recycling yards, rural workshops and storage areas for construction machinery and materials. The Government has to overcome tremendous obstacles to develop the brownfield sites. It is never easy to find alternative space to relocate brownfield operations. Added to this is whether these sites really have potential for development.
Valuation therefore came to the rescue and has a vital role to play. For example, we helped agricultural land owners to explore the feasibility and development potential of converting their land into residential property, and assisted them in resolving issues arising from lease modification and land premium handling. We also see that the Government’s plan on the new town development areas such as Hung Shui Kiu, will play an important role to resolve the problem of relocating brownfield operations to properly-structured buildings. A proper land price valuation mechanism will help more private sectors to involve in the relocation.
Oftentimes there is a discrepancy in the expectations of price. Be they public or private negotiations. This is especially true in the current market, where buyers are looking for discounted prices and sellers or the Government are hesitant to come to the table given the current market atmosphere. Valuation methodology can help narrow the gap by providing an objective analysis of value.
The analysis will also help explain the right value given the various approaches available. This will result in a win-win outcome and make both parties comfortable with the long-term result. And the market needs value guidance to make decisions, strategise and plan. The in-depth analysis and use of comparables and the forecasting for capital and rental values will help making decisions.
For instance, under the current market downturn, there have been a large number of rent review disputes. Due to the unique characteristics of each property and the difficulties to identify similar transactions, rent review valuation is one of the most challenging processes, especially for retail. The appointment of a valuation expert can help with an independent review of the rent from both landlord and tenant perspectives providing a rigorous assessment of the parameters and the process more efficiently.
Perception of a value
There is a perception that a valuation is just a point figure. However, the preceding report provides invaluable information justifying the figure thereby helping to make fact-based decisions. Such information includes but not limited to information about the property to be valued, its positioning in the market, a market overview, transaction analysis, demand and supply analysis, market outlook and other key market research. Then there are the comparables (rental and sales transactions) that provide value guidance, interpretation, comparisons, considerations and rationale as the basis of analysis for the holders of the report.
A thoroughly-researched valuation report not only looks at values today but can also consider forward-looking market movements and value trends. Making this a critical part of financial reporting, negotiation and mediation. In other words, unlocking value for all stakeholders.