30 May 2023John Macdonald

Is your real estate asset worth what you think it is?

Why recent economic cycles require a more stringent approach.

Everyday, asset managers working with NPL portfolios are making decisions on what they do with their real estate assets, taking into account their value, and how they are performing against their business plan. How confident though, are you in making those decisions? Is your property really worth what you think it is? 

These decisions are especially important now since, over the last two years, the importance of liquidity has come to bear as the true value of real estate properties are subject to multiple market forces. In the past, it may have been easier to make assumptions on values, but how will you determine today if you will be able to get cash from your real estate asset? There are many factors which can lead to a discount to the asset valuation you may currently be working with. 

Real Estate isn’t like selling a liquid security, or even gold. It doesn’t hold value in the same way. Ideally, preferred assets are those properties that you know you can get your hands on quickly and sell quickly. This would include property assets with high liquidity – those that aren’t distressed with lots of idiosyncratic issues, or those assets that have a steady and consistent demand, such as apartments, and those that are less significantly impacted by economic cycles.

It’s also true that we have seen the proliferation of technology and data sources aiming to provide real estate professionals with more and more information about properties. The inputs and demographic data used to characterize these properties are often incomplete and unreliable. As a result, accuracy is prone to suffer amid multiple fluctuating macro factors and conditions. 

What are some typical examples for consideration concerning macro factors and economic cycles that could be affecting your property valuation? 

1. A market which has fallen overall might affect different asset types differently – where a logistics warehouse may sell less quickly than an apartment.
2. The condition of the distressed asset where the value becomes lower than expected – the time to sell is far longer and creates a significant cost of carry.
3. Maybe your asset is in a provincial town that is in overall decline.
4. Issues with the title deeds which raise doubts about the property’s ownership, legal status, or boundaries.
5. The idiosyncratic issues that come up when you find your property isn’t getting the value you would expect as it isn’t the same as the ones that sell:

• Your 4 bedroom, 200 sqm apartment might have a ‘use permit’ that has expired, and someone has lost this document.
• Someone has illegally enclosed all the balconies that causes the seller additional complications which impedes liquidity (time to sell) and value.
• Your assets become obsolete over time.

In reality, successful real estate investing is highly diversified, encompassing a wide range of investment options. Real estate investors and property owners must be able to accurately assess and understand the value and risk across a wide range of assets. For example, if a seller wants to dispose of a property quickly, the investor may have to sell it for a much lower price than anticipated. That’s liquidity risk. Without a credible data source, investors lack the transparency needed to make informed decisions that make it easier to diversify their portfolio. Investors and NPL portfolio managers need to know when a potential investment may not monetize quickly. 

Where real estate has traditionally been considered a stable asset class and investment, you only have to look at the last few years to see that the pandemic or other natural disasters have the potential to stress test that theory. Recessions, interest rate changes and even currencies are subject to numerous cross winds and forces that can occur without warning. Even the brightest economists have missed the mark. The lesson is that in the past, home values have risen over time, but that does not necessarily hold true for today. After a major disruptive event, home values and prices may increase in one location while other areas may see a decline based on supply and demand and the demise of idealistic locations. 

In theory, all may seem well with your property value. But valuing an asset can be difficult if you don’t consider all the relevant details including any unforeseen disaster scenarios or idiosyncratic factors. With the help of artificial intelligence, you can easily get a thorough, up-to-date understanding of what your asset is, including its condition and value, using its wide range of external inputs and market data that would be impossible to read and evaluate quickly using conventional manual methods. Importantly, values are subject to change. You can rely on AI knowing that its valuations are always up to date, taking into account recent market changes. Artificial intelligence can help you analyze your portfolio and spot trends in the real estate market so that you’ll always know how much your assets are worth and make sure they are performing well.