Axia Valuers

IVS Challenges to Market Value

The IVSC issues Perspectives Papers from time to time, which focus on pertinent valuation topics and emerging issues. Perspectives Papers serve a number of purposes: they initiate and foster debate on valuation topics as they relate to the International Valuation Standards (IVS); they provide contextual information on a topic from the perspective of the standard setter; and they support the valuation community in their application of IVS through guidance and case studies.
Perspectives Papers are complementary to the IVS and do not replace or supersede the standards. Valuers have a responsibility to read and follow the standards when carrying out valuations.

The IVSC Tangible Assets Board (“TAB”) has received feedback that in some markets there is an increasing difference between Price1 and Value1. Whilst quantifying this difference in valuation terms has commonly been acknowledged as difficult in undeveloped markets where there may be few (if any) comparables and non-transparent information, it has also become increasingly challenging in developed markets despite the abundance of information that exists in these ecosystems.
The current coronavirus epidemic has created a significant layer of uncertainty which has permeated all markets and led to various challenges, particularly as it relates to the availability of market information in a pandemic world. This isn’t necessarily just confined to the basis of Market Value1, but it still raises its own specific challenges. How does the valuer quantify Market Value with a lack of market comparable information in the new COVID-19 world? Where market comparable information is available, have the parties ‘acted knowledgeably, prudently and without compulsion’? Does a pandemic environment enable parties to undertake ‘proper marketing’ or do sales that are witnessed in the early stages of such an event represent an environment comprised of overly willing sellers and opportunistic buyers that is more aligned with a liquidation market?
All of this comes at a time when some organisations around the world are considering a transition away from Market Value because of the difficulties such a basis of value creates during volatile markets. The European Banking Association (EBA) is currently discussing the creation of a more prudential value to work in conjunction with Market Value and meet the requirements of Basel III. The UK Investment Property Forum in conjunction with the Bank of England is exploring a long-term value index to show where we are in the property cycle and to assist banks in making Loan to Value decisions, particularly when properties are at the peak or trough of the property cycle.
And finally, do financial instruments associated with traditional asset classes such as real estate and infrastructure, primarily designed to give greater accessibility to investors, give so much liquidity they challenge the value characteristics that these assets display when held in a traditional sense? Common analysis of ‘Price-to-NAV’ ratios associated with these financial instruments from one perspective would suggest that ‘price is what you pay, value is what you get’. Contrary to this view is that traditional valuation techniques aren’t nimble enough to reflect Market Value in volatile markets and as a result these financial instruments often represent a leading indicator of value.

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