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Capital values confusing for entry-level investors

Auckland CVs

CVs can exceed sales prices by 30 to 70 per cent, warns expert

Council-issued capital values can be hugely confusing for entry-level commercial property investors, warns an investment sales specialist.

Every three years, councils around New Zealand undertake capital value (CV) assessments to set the rates for residential, commercial and rural property.

Gareth Fraser, Auckland Director of Colliers International’s Investment Sales team, says entry-level investors often expect commercial property CVs to be indicative of the market price.

However, in some recent sales the capital value has exceeded the sale price by 30 to 70 per cent.

“In some instances, inflated CVs are causing interested buyers to think properties are out of their reach,” Fraser says.

“In other instances, less sophisticated vendors can have price expectations well beyond what could be achieved in the current market due to an inflated CV.”

Fraser says the confusion can arise because many entry-level commercial property investors have previously invested in residential property.

“Capital values are sometimes included in the marketing for residential properties, depending on whether it is favourable to the sale or not,” he says.

“As a result, many residential investors regard CVs as a good indication of market value.

“However, commercial property is vastly more complex than residential property, so the differences between CVs and market values can be huge.”

Capital values are calculated by a complicated regression model and the properties are not inspected.

A range of factors that are not relevant to residential property, but can influence the value of commercial property, are not taken into consideration.

These factors include:

- Whether the property is occupied or vacant
- Income (below, at or above market)
- Length of lease (short- or long-term) 
- Tenant covenant (strength)
- Guarantees
- Seismic strength
- Standard of repair
- Value of fit out
- Specialised property uses

Kane Sweetman, National Director of Valuation and Advisory Services at Colliers International, says entry-level property investors need to understand why councils carry out CV assessments.

“The capital value methodology is designed to provide consistency and relativity when setting rates,” he says.

“To achieve this, a series of assumptions are made. For example, all properties are valued as freehold for rating purposes, regardless of whether the property is freehold or leasehold.

“Properties are also valued on market rent, rather than real income, regardless of whether the property is tenanted or not.”

Sweetman says these factors are not insignificant when assessing a property’s market value.

“The market value of a vacant leasehold property is lower than a comparable freehold property with a long-term tenant returning above-market rental income.

“However, the CV methodology would value both of these properties the same – making CVs a poor indication of true market value.”

Sweetman says would-be investors should do their homework or use a registered valuer.

“Engaging a registered valuer early in the process will provide you with an up-to-date market valuation of the property, which is invaluable when going into negotiations.”

Colliers International is a market leader in commercial real estate services, with more than 500 property professionals operating from 20 offices throughout New Zealand.

The Auckland Investment Sales team has a strong market presence with offices in the CBD, North Shore, West Auckland and Highbrook.

The Valuation and Advisory Services team has offices in Auckland, Hamilton, Wellington, Christchurch, Dunedin, Wanaka and Queenstown, along with Rural Valuation teams in Tauranga, Nelson, Blenheim and Dunedin.

 

 


Related Experts

Gareth Fraser

Auckland Director - Investment Sales

Auckland

Gareth leads Colliers International's Investment Sales team. The team operates across the entire Auckland market from four strategic locations; CBD (including city fringe), South Auckland (based in Highbrook), West Auckland (based in North West Shopping Centre) and North Shore (based in Takapuna).

This is a large team of brokers and support staff focussed on providing solutions to owners, investors, developers, owner-occupiers and tenants. It features a specialised site sales team focussed on residential land and development opportunites. Investment Sales also includes the syndication division, offerring proportionate ownership opportunities to investors on behalf of clients.

Gareth is also on the Executive Team for Colliers in New Zealand.

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Kane Sweetman

National Director

Auckland

Kane has over 25 years of experience in the New Zealand, Australian and UK real estate sector.

Kane’s experience is truly global having provided valuation and advisory services throughout the Pacific along with various pan-European and pan-Asian portfolio valuation assignments.  In the UK he was directly involved in some of the largest development and land transactions including support for a corporate acquisition by US logistics giant Prologis and the provision of  feasibility studies for the development of London’s Stratford regeneration, which included Westfield Stratford and the surrounds. Kane specialised in retail valuations while in Sydney and valued some of Australia’s largest Shopping Centres.  Since returning to New Zealand in 2012, he has focused on Auckland’s CBD Office market along with mixed use and residential development valuations. 

Kane is a past member of the Auckland Branch committee of the NZIV and was the Deputy Chairman for the New South Wales RICS board between 2009 and 2011. He is a RICS Assessor and has been part of the Oceania Valuation Standards Board along with being Chairman of RICS New Zealand between 2014 and 2020.  In 2011 Kane was invited to become a Fellow of the RICS for his contributions to the Institution and the property profession.  He is currently a member of the PCNZ National Advisory Group.

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