The Marker, Hadar Horesh, 30.03.2020

The Corona crisis is hitting the real estate front on the appraiser front as well, and the industry is currently worrying about a dramatic decline in appraisals - mainly of commercial investment properties. The appraisals are expected to be updated in a few weeks, after Passover.

TheMarker review also shows that public real estate companies are debating whether to see the decline in value in the first quarter reports, which will be published in May, even though investors are already weighing the collapse in the companies' shares and bonds.

The expected decline in real estate appraisers' valuations will affect the entire real estate market, since appraisers set the minimum prices in private property and state property auctions; dramatically impact the business results of public real estate companies; And to a large extent dictate the property taxes that apply to properties as a result of construction plans.

In their valuations, the appraisers rely on hard-hitting assumptions in the face of the acute crisis: long-term interest rates, which determine the asset discount rates, have risen by more than 1% due to the crisis, and the increase is expected to substantially reduce the value of the assets. However, the discount rate used by the appraisers for valuation purposes has not so far risen.

Another basis for valuations is a comparison of transactions made on similar assets in the past. In this case, the appraisers should rely on transactions made in a period very different from the current period, and it is doubtful whether the comparison will be valid.

"Right now we can add a warning note"

Haim Mesilati, chairman of the Real Estate Appraiser's Bureau, states that after Passover, the appraisal branch will need to be re-prepared, due to the paralysis currently held in the real estate market: "What we see in the market today is stagnation and paralysis. The new market in asset valuations. "

Railroad life Photo: Ofer and Kenin

According to Messilati, "Valuations continue to be based on the data we know. All we can do is add to the valuation a warning that current market conditions have changed. The banks that need to approve mortgages make their considerations and take higher security coefficients. 10% to 15% lower than the appraiser - they can take a coefficient of 30%. "

Mesilati further notes that "While the rise in interest rates in the market should affect valuations, at this stage it is a short term and the situation can change, so we have not changed discount rates. If the situation continues for two more weeks, more assessors will have to take the high interest rate into account."

Will all assets be affected in a similar way? In the estimation of the railroads, the risk of a decline in value is higher in the office and commercial real estate market than in the residential sector. "Traditionally, the office market offers investors a higher return and a high return usually involves a high risk.However, not all deferral of rent payments should be considered a loss of income that harms the value of the property, "Mesilati says." It is assumed that renters will eventually pay rent as long as there is no collapse of the tenant's business. That is why we should not rush to reduce asset value. "

Other assessors we spoke with made similar estimates. The appraiser that Molick Cohen also anticipates that the worst hit will be in commercial real estate. "In the valuations of second-hand apartments, we recognize relative stability: the number of deals has dropped and sellers are not in a hurry to settle," he says. "In the area of ​​new apartments, the situation is more complicated. These are apartments under construction or in preparation for construction, and we need to evaluate what their value will be as new apartments. There is a large uncertainty element regarding raw material costs, construction rates and delivery times. Uncertainty also requires ordinary situations to leave room for opinion. For unpredictable events, 5% to 10%. In our estimates today, for banks, contractors or purchasing groups, we increase the margin to 10-15%. "

Cohen said the most difficult problem was felt in the valuation of commercial properties, especially buildings leased to offices or trading. "The valuation of these assets is based on the expected cash flow from rent and discount rate, reflecting the level of risk. These are dramatic changes that will dramatically affect valuations. Some renters have simply stopped paying."

The companies are concerned about the publication of the reports

The outlook for the decline in assets is directly affecting the stock exchange listed real estate companies, which Switzerland has plunged by more than 20% since the crisis. The fall in value should be reflected in the companies' financial statements and could translate into reported losses of hundreds of millions of shekels.

Sea Galilee construction site Photo: Ofer and Kenin

The companies are obliged to make valuations and report them to the public investor following events that cause dramatic changes in the value of the assets. The forthcoming reports for the first quarter of 2020 are expected to be published in May. But executives in the industry estimate that companies will refrain from attaching valuations to reports, on the grounds that the uncertainty is too great to be able to complete.

The research department of a large solar energy company anticipated last week that commercial real estate value is expected to decline dramatically. The company is engaged in the construction and operation of solar power plants and is involved in leasing the commercial property market.

In a review released last week, company analysts wrote: "The current crisis over its dramatic economic effects undoubtedly requires a re-examination of the concept of risk in terms of risk inherent in yielding assets and good economic value. And breach of the lease agreements, creates an unimaginable new reality of stopping rent payments ignoring the rental districts. "

According to the analysis, properties that enjoy good collateral also appear to suffer the most significant damage as the crisis prolongs, and that some tenants are unlikely to survive the long crisis and the expected recession, which could affect renewed rental prices.

The report expects many tenants who have closed their offices due to the Corona virus crisis to meet similar requirements for property owners. A long crisis could lead to the collapse of tenants, and for certain periods where vacant properties will stand, or suffer low price levels, as a result of the expected recession even after the end of the crisis. In the field of logistics centers (Marloggs).

The analysts conclude that "the current crisis, as it deepens, will inevitably lead to a rethink among investors, funders, appraisers and valuers of the appropriate discount rates for risk inherent in various yielding assets."