Australian Property & Business Valuation Journal
ISSUE 3 2021
Rural Valuation All of the tips and tricks you need to know to value rural properties
FEATURES 01
Rural Valuation: Key Drivers of Value
A discussion about key characteristics and valuation methodologies for rural property
02
Real Estate Related Business Valuation A broker's perspective on the industry and the impacts of COVID-19
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TABLE OF CONTENTS 03
Chairman’s Address An introduction to this issue and a general valuation industry update
05
Rural Valuation: A Spotlight A discussion about key characteristics of rural property and the main valuation methodologies that are used
07
Real Estate Related Business Valuation Real estate veteran and business broker Ross Hedditch shares his experience on the factors that influence the value of real estate related businesses
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THE CHAIRMAN’S ADDRESS
I would like to welcome our readers to the third issue of the AVI Valuation Journal. We would like to remind members that the Australian Valuers Institute (AVI) have launched the journal with the intention of creating a resource for discussion, analysis, research, information and news relating to property and business valuation. We encourage our readers to make submissions, as this promotes the quality of the journal and enhances the sharing of knowledge within the industry. We would like to give a big thank you to the members who have made contributions to this month’s issue. We rely on your submissions to create an engaging journal with diverse, educational content which discusses important valuation issues, challenges and market trends. We would love to hear your feedback on this issue and any recommendations that you have to improve future issues.
Paul Waterhouse Australian Valuers Institute AVI ISSUE 3 2021 PAGE 3
The Australian Property & Business Valuation Journal is published by the Australian Valuers Institute as educational material for its members. At times, the Australian Property & Business Valuation Journal publishes technical material to assist professional practice which is supplied by contributors and third party sources. We accept no liability for any information, opinions, outcomes or the effectiveness of any formulas or calculations contained in articles included in the Australian Property & Business Valuation Journal. Whilst care has been taken to ensure accuracy, we strongly advise readers to seek independent, specialist advice on matters concerning business practice, financial outcomes and legal implications and to conduct their own investigations into any information included in this journal. Further to this, any comparable sales evidence included in this publication should only be treated as a guide/’check method’ and we do not accept any liability for any inaccuracies or misreporting of comparable sales. We strongly encourage members to source their own comparable sales evidence to support any conclusions made in valuation reports. Any members who are seeking further information on the topics and valuation methodologies covered in this journal are encouraged to contact the editor.
THE EDITOR Kristy Kerswell PO Box Address: PO Box 6219, Frenchs Forest NSW 2086 Phone Number: 1300 748 506 Email: admin@valuersinstitute.com.au AVI ISSUE 3 2021 PAGE 4
BY KRISTY KERSWELL
Rural Valuation Factors & Methodologies A discussion regarding the merits of different rural valuation methodologies and the key factors that valuers must consider when approaching this asset class.
A potential purchaser of a rural property will base their opinion of value on a combination of comparable sales analysis on the investment return that they will likely receive on the property. A key issue that arises during a rural valuation is a paucity of comparable sales evidence. The valuation of rural property is a complex exercise which involves a myriad of considerations. The valuation of rural property is intrinsically linked to the productivity of the land. Rural areas are often the most economically productive types of land, and the value of rural land is therefore intrinsically linked to the viability of the business conducted on the land. There are two main bases of rural valuations. (1) GOING CONCERN A going concern valuation is inclusive of the land, the fixed improvements and the stock. This is commonly referred to as a “walk-in walk-out” value which will allow the new owner AVI ISSUE 3 2021 PAGE 5
of the property to pick off where production left off. This is inclusive of goods, chattels and agricultural machinery. (2) BARE PROPERTY A bare property value is the valuation of the land with fixed improvements, but without stock. Valuation Methodologies for Rural Properties A recent trend in rural valuations is a shift from the productivity approach towards the likely returns that an investor could expect to receive. International investor interest in Australia’s rural sector has catalysed this shift, and it has stemmed from demand for a defined, measurable investment metric that can be clearly linked to value. Notwithstanding, there are four key valuation methodologies used for rural properties:
(1) The direct comparison approach whereby a valuer compares the valuation subject to properties that have sold, making adjustments for differences in key features and characteristics. A rate per ha is generally determined as a ratio for comparison. Key factors assessed include topography, natural vegetation cover, improvements, plant and equipment, rainfall and soil moisture levels. When assessing the characteristics of the land, care should be taken to evaluate the various portions of the property and their respective uses and values. For instance, whilst one area of the land may receive good rainfall, another area of the land may not. (2) The summation method whereby the land and improvement value are apportioned separately. This allows for further analysis of sales evidence. (3) The productivity approach whereby an analysis
of a rate per livestock is determined. This method assess the productive capacity of the property and places a value on this capacity. Common standard units of measurement include adult equivalent (a 450kg steer or non-lactating cow), dry sheep equivalent (a 45kg wether or non-lactating ewe on a maintenance diet), standard cattle unit (a 600kg steer or cow access to verifiable data. In in a feedlot) and $/bird (relates the majority of cases to poultry assessments for meat (regardless of whether bank production). or owner instructed), the valuer is not provided with copies of the last three (4) The income approach which to five years’ trading and involves the assessment of the production figures for the future net return of a property business. At best they will and subsequent application of a get copies of stock books capitalization yield. This to understand the stocking approach is reminiscent of the densities relative to seasons, way that commercial buildings maybe a property plan, a are valued, and is not commonly summary of capital used. Notably, valuers that have expenditure in recent been adopted this approach periods and some rainfall have been successfully litigated data. The balance of against. information relevant to the property’s financial performance is usually (5) The discounted cash flow anecdotal, for example analysis approach which branding rates, yield from requires modelling the crops, bales per hectare for expected income and net profit cotton, etc. and subsequent conversion of the income stream into a There are many agribusiness purchase price, which is based services firms and on the expectation of a accountants who perform particular rate of return. benchmarking for their However, this method is prone clients’ businesses. Reports to inaccuracy, as it relies upon reflecting gross margin per assumptions such as yield, hectare, unit cost of commodity prices and production, return per operating expenses. paddock and other measurements are all very One of the key requirements to useful tools to help business assess a property on a financial decisions. However, whilst the gross margin data and return basis is
“A rural valuation is intrinsically linked to the productivity of the land”
analysis is great, in some cases the gross margins do not actually cover the overheads cost within the business and the result is a financial loss overall. Overall it is hard to show a clear correlation between investment return and land values on a year in, year out basis. As a pure investment the return if operated in isolation may not be viable and this is specifically evident for smaller-scale holdings which do not attract institutional capital. The big end of town holdings require a scale of operation that allows for independent management and return as there is no cross-subsidisation of the transaction from other assets. Corporate capital with investment discipline requires a regular return and it is one of the reasons that investment into the Australian agriculture has been a challenge. Ultimately, whilst the valuer’s role is to interpret the market and sales transactions, the buyers and sellers of the assets set the market and the pricing. The valuer needs to understand why a particular buyer paid a particular price for a property or why the vendor sold the property for a particular price, hence why the job of interpreting value through drawing conclusions through correct comparison techniques (which only comes with experience) is very subjective. Valuation is often referred to as an ‘inexact’ science.
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BY KRISTY KERSWELL
Real Estate Related Business Valuations Real estate industry veteran Ross Hedditch shares his experience on the factors that influence the value of real estate related businesses.
What drew you to the area of real estate business sales, acquisitions and mergers? So, one of things that you asked me was what drew me to real estate business sales. I have been a real estate agent my whole professional life and had my own business which I sold in 2004. I received an offer from a publicly listed company and sold that business. I had around 2,500 properties under management and around 80 staff. We had components of the business, including property management, sales, advertising and a home loan company. After I sold the business, I was too young to retire and one of my Sydney colleagues suggested that I get into this area. And you know, I’ve thoroughly enjoyed it and have been doing it since 2005. What factors drive the valuation of real estate related businesses such as rent rolls and strata rolls? While what I do is not difficult or unique, it is somewhat challenging to value these businesses as they are quite specialised and the areas of valuations that I tend to get involved in are internal partnerships, valuing for business vales and valuing for family law purposes. I also did a course in mediation, which I have found helps me to assist with
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negotiations. What I have seen recently is that the business has been changing and being more challenging. We are now seeing more mergers occur than I have ever seen previously. You know, when two agents are competing against themselves, they have a professional understanding of each other. They are there, and they are competitors and they are now joining forces to bring themselves into the same business. And that presents the most difficult type of transaction, as a merger is essentially matching two businesses together. So, you asked me what factors drive the values in a real estate rent roll. I would say that a number of factors are considered. For instance, the number of properties under management, the location of those particular properties, the geographic spread of those properties. Is it metropolitan based? Is it a particularly nice suburb or area? You have to look at the commission rates excluding GST that you achieve out of those particular properties. And I would say that the average annual management fee income per property per annum is the key driver of value. Another factor is the number of landlords as a ratio of property and looking at the concentration of landlords and the
distribution of risk across the business. The experience of the valuer often determines the accuracy of the business valuation. In what ways do you think your business broking background enhances your valuation practice? So, these are the nuances that you have to take into consideration to reach the value and to take into account these nuances, you have to have a wide range of comparable sales evidence which can often be difficult to source. As I am an experienced broker in this area and am commonly transacting these businesses, I fortunately have assess to this information which I think increases the quality and accuracy of my valuations. I can defend any of my valuations because I have the data backing it. This is the difference when you value industry segment businesses, whether it is real estate, strata, accounting or law, it is all about having an understanding about the nuances of the businesses. I think it’s important to distinguish between the features that form the value and influence the value as well. I think also my personal experience running this type of business enhances the accuracy of my valuations, as the background issue is “what are the key features to this business and how did it run?” “What are the expense items in a business to look for?” and “What’s the ratio of staff to property management?” AVI ISSUE 3 2021 PAGE 8