The Importance of Multiple Methodologies in Valuations
SitusAMC is a leading provider of commercial real estate and debt valuations. In 2022, the firm evaluated more than $2T in CRE assets and completed 21,000+ reviews and appraisals. We spoke with Jonathan Kendrick, SitusAMC’s Head of Real Estate Valuation Services Europe & APAC, about three key areas to consider when determining the appropriate commercial real estate valuation methodology when reviewing valuations across the globe:
Consideration One: How would a hypothetical buyer underwrite the acquisition?
Is the methodology adopted in line with how other participants in the market would underwrite a transaction? This will vary by market, asset type, and also by current market conditions, and is particularly relevant in the current economic climate with fewer transactions completing and greater judgement required in yield selection.
Consideration Two: What are the primary and secondary methodologies considered?
Valuers should demonstrate they have considered all available market data and approaches in supporting their final conclusion. The principle of ‘revalue as you devalue’ remains and consistency needs to be applied to the methodology used to analyse comparables and how these outputs are applied to the subject valuation.
Outside of the UK multiple valuation methodologies -such as direct comparison, discounted cash flow (DCF), direct cap and cost approaches - are often referenced and weighted in determining the final value conclusion. It is important for valuers to share any supporting methodologies with their clients.
There remains a lack of availability of DCF analysis for key data points such as discount rates in the UK and European markets. This leads to greater reliance upon the Traditional Income Capitalisation or capital value per area approaches in analysing comparables, where less assumptions are required compared to a DCF. All stakeholders in the industry, including buyers and transaction teams, need to continue to support the availability of this data to enable valuers to accurately analyse comparables and reflect these in valuations.
Consideration Three: What are the client requirements?
Many of our clients have global portfolios and require specific analysis to allow them to roll up data and analyse their assets as a single portfolio, regardless of location. The valuation industry needs to continue to adapt to meet the changing needs of the end users. DCF is the preferred methodology for this analysis, given the number of data points and the ability to compare cash flows.
The requirement of a specific methodology such as DCF should always be considered alongside any other appropriate methodologies.
In conclusion, there is not a one-size-fits-all approach to determining the valuation methodology to be adopted. Valuers should demonstrate they have considered all relevant approaches, documenting the rationale for each methodology adopted and for those that have been given less weight or been disregarded.
SitusAMC’s Real Estate Valuation Services business supports a global client base of equity funds and lenders with appointing and reviewing valuations, data aggregation, reporting and analytics. This provides unique insight to the approaches taken by valuers in different geographical locations, as well as the varied requirements of end users.
Please contact Jonathan Kendrick (email@example.com), SitusAMC’s Head of Real Estate Valuation Services Europe & APAC, for more information on how we are supporting clients with their valuation practices, data aggregation and reporting requirements.
To learn more about SitusAMC’s European CRE Solutions including Commercial Real Estate Valuations, click here.