Misconceptions around the term ‘willing seller’ lead to distortion in property values – having a significant effect as commercial property markets are destabilised and investors are left in the dark.
In commercial property markets across Africa, we’re seeing an all-too-common scenario emerging: property assets are often valued according to the wrong criteria.
This can have detrimental consequences for all parties involved.
Inaccurate valuations lead to false expectations among sellers, poor investment decisions from buyers, and ultimately contribute to illiquidity and uncertainty in already sluggish markets. Property investors are left with overstated or understated balance sheets, and in the worst cases, this can even lead to substantial write-downs.
One of the roots of the problem is the tendency to value property assets based on perceived long-term sustainable value, or other non-market considerations. These fallacies include being guided by the value of the property when purchased, the value of investments made into the property, or expectations of the property’s future value.
“In reality, true asset valuation should be based on a very tangible ‘mark to market’ valuation that reflects real-world market conditions in the present moment. In other words: how much a property would actually sell for, on the open market, today or at the date of valuation,” JLL’s Director of Valuation for Sub-Saharan Africa, Joshua Askew explains.
“All other considerations – such as income modelling, due diligence, comparable analysis, cash flow and letting risk analysis, or ecological issues – may contribute to calculating a property’s Market Value.”
But, the ultimate definition of value, he says, “must be based on how much it would practically sell for, in open market conditions.”
Lost in translation
Perhaps the biggest area of confusion is the concept of ‘willing seller’: a term that is central to the valuation criteria set out in the RICS Valuation – Global Standards 2017. This guide provides global best-practice to commercial property valuation, as it harmonises both the original RICS Valuation Standards, as well as the IVSC International Valuation Standards.
RICS defines the ‘willing seller’ as someone who is “neither over-eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the asset at market terms for the best price attainable in the open market after proper marketing, whatever that price may be.”
But when faced with tough market conditions, for instance, we often find landlords saying ‘I wouldn’t be a willing seller at that price’. This way of interpreting the phrase ‘willing seller’ is hampering property valuation and is not what the definition of ‘willing seller’ means or is supposed to mean at all.
What needs to be recognised is another phrase which has been part of the International Valuation Standards for many years: the concept of ‘motivated seller’. A motivated seller is one who is motivated to sell at the best terms currently available in the market, devoid of any preconceptions around what they feel is the value of the asset.
Analogy to our own lives
Askew says we can draw an analogy to our own houses in the residential property market: “We may have bought the property at a certain price, invested a certain amount in renovations, and seen similar properties sold on the same street.”
“We may even have built up certain sentimental value, or factored in other expectations – such as a new train route or shopping mall being planned nearby.”
“But the reality is that all of these considerations are secondary to the actual selling price that you could receive, if you were to put your property up for sale now,” he reiterates.
RICS emphasises this point, and goes on to clarify Market Value from another perspective:
“Because bases other than Market Value may produce a value that could not be obtained on an actual sale, whether or not in the general market, the valuer must clearly distinguish the assumptions or special assumptions that are different from, or additional to, those that would be appropriate in an estate of Market Value.”
In our example of the residential house, we must strip away all our assumptions and remove ourselves from the equation, getting to the core of the property’s value: how much a buyer would actually pay in today’s market, not how much a seller would be willing to sell for. The definition assumes you are motivated to sell at the best price an open market purchaser will pay in the market; not at the price at which you would be comfortable selling.
Despite sounding like a simple principle, we’re seeing considerable over- or under-estimations of value in property markets across the continent. Often, we find local valuers being swayed by the wrong information, pricing-in hoped-for future scenarios – which culminates in an estimate of worth, and not an objective view on the asset’s value in the open market, based on the best realistic offer which could be achieved at the date of valuation.
It’s time to slay the myths around the phrase ‘willing seller’ and concentrate on the actual Market Value, which revolves around the assumption that the seller is already ‘motivated’ to sell at the best price obtainable in the current market; this is the true ‘mark to market’ approach. This rightly means that the Market Value for any asset is the best open market offer price available at any time, not the seller’s own view of what they would sell at.
Ultimately, it’s only by accurately valuing our assets that African economies can attract greater investment, stimulate local business success, and power the future growth of our continent.