Professional Appraisal is Vital

“The coronavirus has struck the Israeli economy with the force of a whirlwind, leaving a trail of damage in its wake, including in the real estate sector. As the Ministry of Health began implementing restrictions, the real estate sector was declared a key sector for the economy, a consequence of its outsized contribution, totalling approximately 80 billion NIS. While building sites remained operational, it is nonetheless clear that – should the market return to regular activity in the coming days and weeks – the real estate appraisal sector will need to adjust in order to reassess property values. This is a wide sector that includes several sub-sectors within it, each of which will be affected in different ways. When it comes to residential real estate, it’s important to remember that there was market demand before the coronavirus, and there will continue to be market demand once the economy returns to regular activity.

“When we checked house prices following extreme events in the past, we found that the Israeli economy was able to overcome the challenges, and over the long-term, house prices even increased after the event. At this point, the shortage of raw materials has led to concerns over delays in starting construction and delivering new homes. With that said, those investors who are currently pulling out of the stock market prefer to invest in real estate. They are no longer hesitant about an 8% purchase tax, as they are losing significantly more than that in the capital market. Therefore, we anticipate seeing more investors seeking real estate opportunities in the coming period, especially but not exclusively in the second-hand market.

“There are many real estate developers with properties that are ready to be occupied. These properties may be suitable for investment, as they will provide an immediate return. Furthermore, these properties will not be impacted by the coronavirus pandemic and the threat of delays to delivery as a result of shortages of construction workers or raw materials. It is reasonable to expect that this situation could pull the market upwards. On the other hand, a continuation of the crisis and an increase in the unemployment rate may cancel out this trend and lead to low demand – which will force sellers to compromise. The duration of the crisis is what will determine which of these trends gains the upper hand.

“The situation is far more complicated in the income-producing real estate market. Here, in offices and commercial real estate, there is a greater risk of a loss in asset value than there is in the residential sector. Traditionally, the office sector offers investors a higher yield, which usually goes hand in hand with a greater risk. So when might the value of assets take a tangible hit? When the tenant’s business collapses, leaving behind unpaid debt, or if there is a trend towards minimising office space in response to reduced business activity. Another scenario that may occur is an increase in remote working and a subsequent reduction in demand for office and retail spaces.

“It is hard to gauge how the commercial sector will look on the day after. Will chain stores go into administration? How many businesses will be forced to close as a result of the crisis, and will there be others that come up in their place? A real estate appraiser must be constantly evaluating the market, the situation of the companies involved and the potential risks. With that said, the term ‘value’ (as opposed to price) takes into account market behaviour over time. Being alert to general risks and cap rates for income-producing real estate assets, including those that are part of the asset portfolio of publicly-traded companies, as well as short sale discounts – these are excellent tools available to the appraiser, although he or she apply them judiciously. The present condition of the market is murky and unclear, and the temptation to seek ‘opportunities’ is great. The odds of success without the support of a professional appraiser, however, are remote.

The writer is the director of the Real Estate Appraisers Association in Israel