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Valuing Real Estate Offices The last 3 months has seen a sharp upsurge in the number of real estate agencies requiring valuations or considering selling. This is not surprising given the media focus on the downturn in the housing market and major residential firms reporting a 15% decline in sales in the last quarter.Real estate is a cyclic industry. The last four to five years has seen an unprecedented boom, particularly in the Auckland market. This has been fuelled by immigrants, a plentiful supply of mortgage money, high employment and a buoyant economy. Things change and the slowdown is evident. As with all professional practices the valuation of real estate agencies presents problems not experienced with other types of businesses. Generally they will have low tangible assets. Licensing requirements impose a barrier to entry. Their reliance upon the salespeople to produce the revenue – but cannot be sold in a sale. And it is likely that there is a high level of personal goodwill arising from the owner/licensee’s experience, skills and relationships that is not readily transferable. In appraising a real estate office asset-based, earnings-based and market-based approaches should all be considered. But whatever methods are used there will be a significant amount of subjectivity involved in arriving at an opinion. Setting up a new office can be expensive but most of the cost will be in fixtures and fittings, computers and software. Liquidation value is likely to be well below book value. Capitalised earnings is the most commonly used method for valuing businesses in New Zealand. However, it is very difficult to estimate a future maintainable earnings figure given the cyclic nature of the sector and they are very top line driven enterprises. It is difficult to adjust back expenses when there is a 20% drop in revenue – with a catastrophic impact on operating profit. It is difficult also to assess an appropriate EBIT capitalisation rate. In the last couple of years we have used rates ranging from 35% to 100% depending on the particular features of the subject business. Market data is usually persuasive – but not conclusive. BizStats™ can give us some guidance but need to be used with great care. A credible valuation will involve careful analysis of the agency – it’s history, profitability, location, assets and facilities, services, competition, staffing, systems, databases and branding. Real estate businesses can be very profitable. Those who have been in the industry for many years know that the sun always shines again – that after every bust there is always a boom. |
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