In the wake of the Queensland and Victorian floods, as well as Tropical Cyclone Yasi that devastated towns in Northern Queensland and created flash flooding as far south as Melbourne, many are asking what impact such disasters will have on the value of affected properties.
In a recent newsletter, The Australian Property Institute says it is reviewing valuation procedures for property impacted by a natural disaster and will produce new guidelines to be applied right across Australia. These reforms will be based on similar incidents to those that occurred recently and could take some time to come into play.
As an interim measure, the API has published a number of valuation principles to be followed for properties in the wake of the Queensland floods that can be applied to “any property where there is a lack of evidence.”
The API says a valuation should not simply provide a description of the property and a figure of its worth, it should also give the reader of the valuation some insight into how to deal with the asset.
“Certainly in the immediate future there may be a more limited market for inundated property but that does not necessarily mean there is no market,” says the report.
“Each case however must be treated on its merit. There is no fixed formula. The overarching principle is ‘What information will assist the reader in considering the valuation?’”
The API makes a number of suggestions as to the different considerations to be made when a property that has been flood affected I valued. These include;
- Details of whether the property was inundated and if so, to what extent. For instance, was the area around the property inundated but not he property itself, or was the property partially or completely inundated?
- Would a smaller flood event have inundated the property and with what frequency might floods impact that property?
- Differentiation between the impact on residential, commercial and industrial premises.
- How the potential purchaser might react to the fact that the property has been inundated by flood waters – ie. owner occupiers will feel differently to investors.
- For properties that have suffered extensive damage that cannot be quantified by the valuer or where the resulting stigma is too great for proper consideration (such the Lockyer Valley), it might not be possible to apply a valuation at all.
- How long will the memories of the floods impact potential purchasers and therefore values?
- Do buyers and residents believe the advantages of being close to the water and on Brisbane’s riverfront outweigh the disadvantages, such as potential for flooding?
- For agricultural land and areas – what is the impact on primary industry and how long will it take for the land to be viable again?
In addition to these considerations, the API says that institutions providing funding for properties in these areas (such as lenders and banks), must also take into account certain ramifications for such natural disasters.
These include things like; the level of risk in providing funding for these properties, whether or not the premises would be habitable after such flood events, how the value of the property might be impacted, how easily the value of the property could be realised if required (eg. If the bank needed to recoup their money on a mortgage default) and in the case of an investment, whether the property might remain vacant for an extended period due to damage. Then of course there’s the question of whether the property can be insured.
There is no doubt that all of these issues will be at the forefront of the valuation industry’s discussions over the coming months.
And as much as it will be difficult for many homeowners and investors to accept, there is a chance that formal valuations could come in lower than expected as a direct result of flood damage. For many this will just be a number on a piece of paper as they rebuild their homes and stay put.
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