Confusion on capital values

Council-issued valuations are confusing and can scare off first-time commercial property investors, a sales director says.

Every three years, councils around New Zealand undertake capital value (CV) assessments to set the rates for residential, commercial and rural properties.

Colliers International investment sales Auckland director Gareth Fraser said entry-level investors often expected commercial property CVs to reflect the market price.

However, in some recent commercial sales the CV has exceeded the sale price by 30 per cent to 70 per cent.

‘‘In some instances, inflated CVs are causing interested buyers to think properties are out of their reach,’’ Fraser said.

‘‘[Meanwhile], less sophisticated vendors can have price expectations well beyond what could be achieved in the current market due to an inflated CV.’’

Confusion arose because many entrylevel commercial property investors had previously invested in residential property, he said.

‘‘Capital values are sometimes included in the marketing for residential properties, depending on whether it is favourable to the sale or not,’’ Fraser said.

‘‘As a result, many residential investors regard CVs as a good indication of market value.

‘‘However, commercial property is vastly more complex than residential property, so the differences between CVs and market values can be huge.’’

Factors that could influence the value of commercial property, but which were not taken into consideration when setting CVs, included vacancy rates, rental income, leasing length, seismic strength, fitout, repair works, and specialised use.

QV general manager David Nagel agreed commercial property valuations were more complex than residential valuations, and could lead to confusion.

The three-yearly council rating cycle would naturally create some variance between CVs and sale prices, he said.

‘‘For example, in Wellington City the last revaluation occurred in 2015, so we expect notable differences between the two values, whereas we’d expect less in Auckland as their revaluation took place as recently as July last year.’’

Councils, or a valuation service provider, surveyed property owners when completing revaluations of a city or district.

‘‘This information is used to help determine market rental levels, vacancy rates and operating expenses at the time of the revaluation,’’ Nagel said.

‘‘Discussions with local property professionals help complete the picture to ensure a robust approach is utilised.’’

A Wellington City Council spokesman said anyone entering the commercial property market should seek professional advice, preferably from a valuer.