10 Jun COVID-19 Crisis Update
The COVID-19 Crisis
There is a consensus in the industry that we are not certain as to how long this challenging time will last. The end of 2019 and beginning of 2020 was very busy for Australian Valuers. The market was booming. Transactions and re-finance valuations were happening up to the end of February.
In early March the thriving market came to a sudden halt. March was a month of confusion for everyone in the industry. It became impossible to deny the seriousness of the pandemic and its implications, but it took time for different industry players to get to terms with the gravity of the situation.
Depending on whom you spoke with: a valuer, an accountant, an agent, a broker or a banker; the mood varied from optimistic to cautious to depressing. Once the international borders were closed, it became the sudden reality that short term accommodation providers were facing a desperate situation. However, for some time some people were still hopeful that the domestic travel would continue to flow. Then the State borders shut down.
We observed that the majority of purchasers of short-term accommodation complexes pulled out from the contracts. There have been deals which proceeded, which upon further investigation revealed to be a situation wherein it was too late (legally impossible) for the Purchaser to walk away from the contract relatively unscathed.
Many agents at the time suggested that because short-term accommodation businesses were essentially out of the picture, the long-term businesses would attract a special interest from the buyers and sell at a premium.
It is understandable that for Vendors, who expected to sell their high netting businesses in good locations for 6+ times multiplier in January – February, it would be very hard to agree to a sudden price reduction. But the GFC showed us that the long-term accommodation market relies on the employment confidence. The markets do not like uncertainty. Once the Government closed all the “non-essential” businesses, many people lost their primary income sources. During the second part of March everyone was holding their breath waiting for the Government to announce the stimulus packages to help struggling tenants.
The Government responded quickly and introduced Job Keeper and Job Seeker stimulus. Valuers, however, are concerned about the increased vacancy periods and softening of rents. The government stimulus helps, but they are not ensuring the same quality of life for people. There is recent anecdotal evidence of tenants breaking the lease or waiting till the end of the lease and moving to a less expensive developments.
There are various factors affecting different locations. For example, the Gold Coast rental market has seen an influx of units available for rent as serviced apartments are trying to convert their short-term lettings to permanent or semi-permanent. In saying this, many Managers and investors in tourism hubs like Surfers Paradise or Burleigh Heads do not want to commit to a long-term tenant on a 12 month lease as they are expecting the domestic travel to resume in next 3-6 months.
In response to the COVID-19 crisis, we ask the Reviewing Accountants to prepare two sets of figures: historical and a forecast. This forecast P&L should take into consideration the increased vacancy allowance, rent and letting fees reduction. Until restrictions in Australia are further lifted, we are using the forecasted NOP for our calculations and adopt an appropriate market multiplier to it.
After adopting a softened multiplier to the difference between the two P&L’s we add the amount to the capital value. This represents income the business may or may not loose over next year or two as the market struggles to recover.
Regarding the business multipliers, it is important to remember that the multiplier/years purchase factor sits within a range. At the moment, we are eagerly waiting for sales evidence occurred after 1 March 2020. In its absence, we have to consider available pre-COVID 19 sales. The adopted multipliers depend on each property’s unique circumstances and characteristics.
As specialist management rights valuers, we would love to see the management rights market booming again. It is important to note that lawyers and banks generally expect the valuers to give solid figures, which reflect our best estimate of the value based on the current risk in the market. Merely adding risk clauses in the valuation reports would not be a sufficient response.
On a positive note, many agents are reporting on the deals in progress and there have been a number of quotes sent out.
April and May 2020 overall have seen limited amount of transactions or re-finance deals. It appears that many Vendors would rather take their property off the market, than lower their expectations. Another reason is that the finance industry is taking longer to process and approve the deals. Everyone waits for the signs of recovery, for the return of an overall confidence.
Article by Ekaterina Ivandikova