THE BEACO BRIEF
From a recent The Wall Street Journal article: "Real-Estate Valuations Vex Pension Funds" and pose a risk, several direct quotations from the article follow:
"Figuring out what privately held assets are worth has always been harder than with publicly traded stocks and bonds."
"The pandemic has made that process a lot more complicated. Deal making has slowed dramatically, giving investors fewer templates to price assets."
"The scarcity of traditional data points means estimated values may not... (result)... in the true impact of the pandemic..."
To gauge values and risk, we conducted telephone interviews with three local well-qualified real property appraisers with whom we work, and asked about property values at this stage in the pandemic. Their responses are briefly summarized below:
: There have been very few sales. Values are based largely on what brokers tell us in answer to our questions. We ask them: Have values dropped in the interim? Has rental income declined? Have cap rates dropped?
It's all based on pre-pandemic values and the perceived market conditions now. Their answers together with pre-COVID-19 valuations enable us to estimate current values.
: Sales and rental activity are way down, the buyer pool dropped off; so we can't gauge value the percentage drop. What was somewhat optimistic one month ago has turned bearish -- fear in the short term. Three million individuals have moved in with parents.
Land sales have taken place -- it takes time to develop properties, so by then the pandemic "may be over" say the buyers. Retail property values are hardest hit -- no shoppers, particularly clothing resellers, rents are not being paid, benefit packages are ending soon; less decline for industrial properties; residential apartments in the middle.
In Q2 1990, debt financing was largely unavailable, thereafter the real estate market crashed -- today financing is largely unavailable; 40% - 50% down payments required -- same scenario as in 1990?
: Sales data is lagging. Some mid-March sales coming in. Still too early to tell where values are now going. Number of transactions are down. Sellers holding on the sidelines -- some saying "why sell now if in one year things will get better" -- 2021 recovery hoped for (optimistic?)
Lenders are not foreclosing now -- they would then have to resell properties or hold onto them. Values are lower for retail properties, residential apartment properties doing better with lower decline in value.
For those who may be considering conveying ownership interests in real properties, now appears an opportune time to do so.
Stay well and safe.
Larry Grant, President
Contact Business Enterprise Appraisal Company at: 818.591.9282