Market and fundamental valuations often confused

04-10-2005

It is not uncommon for property market commentators to confuse market valuations with, what Rode terms, fundamental or speculative valuations.

"A valuer's task is to consider empirical data in the form of actual sales when determining the market value of a property", says Erwin Rode, editor-in-chief of Rode's Report, a quarterly publication on the state of the local property market.

"When we're doing a market valuation, we have to objectively weigh up the actual market data and apply that to determine the net asset value of properties."

Rode explains that a fundamental valuation, on the other hand, is a subjective exercise, and is an attempt by the valuer to forecast the market.

During times of fast-changing market values the distinction between the two values can become a bit unclear. In such a situation, comparable transactions as recent as two months old could already be too outdated for use in a market valuation.

The residential property market went through such a phase during the last few years, and the shopping-centre market is currently in such a fast-changing phase. In the case of the residential property market, however, the frequency and volume of sales is generally such that very recent comparables are readily available. In the case of the non-residential market, however, paucity of sales forces the valuer to try and estimate (not forecast) by how much the market has moved between his valuation date and the date of his last comparable transaction. This is, however, not equivalent to a fundamental valuation as it does not involve forecasting.

“It is the failure to make this distinction that often leads to valuers being accused of conservative valuations”, says Rode.

The valuer’s task is to report on the market, not to forecast it.