- Finance

COVID-19 Pandemic: Impact on Property Valuation in California

The corona crisis has also left its mark on the real estate market in California. Real estate experts dealt with current market developments and explained the consequences of the COVID-19 pandemic on property valuation.

As part of a property valuation, the first step is a detailed analysis and examination of a property according to its economic, technical and legal conditions. In order to correctly determine the market value, the expert is also required to have profound knowledge of the specific real estate market segment with its current market data and key figures relevant to the reporting date. The results of the property analysis, market knowledge and experience of the appraiser ultimately flow into a well-founded determination of market value. The COVID-19 pandemic is now also presenting real estate valuation with new challenges which include business property tax California.

Lack of Market Evidence

Since the financial crisis is lasting for more than one years, the dynamics of the real estate markets not only in this country, but also internationally had increased significantly. In many asset classes, price developments in recent years have been characterized by continuously falling real estate yields. Reports of maximum prices that were achieved shaped the market. Completely unexpectedly, the corona crisis slowed this real estate market event in March 2020 and even brought it to a complete standstill for a short time. This poses a considerable challenge for real estate valuation, since a correct valuation result is essentially based on current market evidence from concluded transactions or rental agreements. In the meantime, various asset classes have developed quite differently so the area of ​​residential real estate,

Effects on Property Valuation

A full assessment of the future effects of this crisis situation cannot currently be made. We are still in the middle of the action. The framework conditions with regard to restrictions in daily life, travel warnings and regulations for the economy are constantly changing in this country and internationally, and have significant consequences. Some general trends differentiated depending on the asset class – are assessed quite similarly by many market participants, but the real estate valuation with business property tax California focuses on the individual property and the specific location with the local market environment.

Both short-term and medium to long-term effects must be taken into account in the valuation. Effects on the expected yield are possible in the short term. Loss of rent, rent reductions and deferral agreements influence the amount and timing of future cash flows. In addition, difficult marketing conditions can lead to prolonged vacancy periods. Such short-term, temporary effects can be clearly shown in the valuation. Medium to long-term effects, especially with regard to the development of rent and yield levels, are open and can only be mapped in scenarios or sensitivity analyzes.

Pay Attention to Property Appraisals

Appraisals in the context of real estate market must always be inspected; otherwise the appraisal cannot be validated by the validation institute. Banks and mortgage lenders also require an internal inspection. In that case, observe the necessary and prescribed measures, such as:

  • use gloves and disinfectants
  • do not shake hands
  • keep 1.5 meters away

Valuation uncertainty

A large-scale crisis often leads to a sudden drop in demand, as a result of which hardly or no transactions take place. This will most likely happen now. The effects will manifest themselves in different ways per sector. Determining a market value under these circumstances is accompanied by many uncertainties, because recent transactions prior to the COVID-19 pandemic are often no longer comparable.

The valuer should include a clause stating that extraordinary market conditions have created disproportionate uncertainty with regard to the valuation outcome. Optionally, it can be added that if a sale or purchase would be considered, a revaluation at that time is desirable.

Conclusion

The highest level of market expertise in real estate valuation is more important than ever in order to correctly interpret further market developments, especially in relation to the specific property. The objective and neutral expert opinion is of paramount importance right now: Risks must not be overlooked, but also not incorrectly assessed, for example through blanket devaluations.

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