Property Valuations: Speculation or Fundamental-Driven?

The process of valuation of any asset class (including real estate) is one of the most debatable concepts in finance. Sure, valuation is certainly a subjective assessment of different factors, but it must reflect a true and fair value of an asset and not a figure presented in the sole interest of the builder or seller.

Valuation of property impacts all players in the real estate market viz. developers, buyers and sellers, financiers and investors, lending agencies and project appraisers, regulators and tax collectors. In the developed markets, Real Estate Pricing and Valuation is organized on the basis of intellectual contribution to the appraiser decision making and valuation accuracy, application of non-traditional appraisal techniques such as regression and the minimum-variance grid method, appraising contaminated property, ad valorem tax assessment, and new perspectives on traditional appraisal methods.

Though Indian real estate is not as mature yet, developers are adapting to the process of valuation lately. In the process, valuations have gone up dramatically and they are unsustainable. Real estate valuation practices in India have resulted in overvalued properties in many sub sectors like apartments, bungalows and commercial centers and have fueled the appetite of speculators.

Many investors may find themselves trapped in illiquid sectors where either the value of their investment has eroded in real terms or where returns have remained low when taking into account the opportunity cost of holding such investments. Prices are already going down in many regions and there is still more room for correction. For the longer term, things looks pretty good and people who did record constructions last year are talking about constructing more in the next year. Currently, these targets are difficult to accomplish as execution would be a big problem and this will impact their stock prices.

Though lot of money is available as equity, debt comprises 60-70% and property developers are stretching themselves with too many projects at the same time. Larger companies are still well positioned financially, but valuation remains a critical issue. And as India lacks an organized supervisory body for property valuers, we wish to provide some helpful tips in our upcoming issues in order for small investors to make a wise investment decision when considering a valued property.