Property valuation practices queried

Press, 10 March 1984, Page 20

Property valuation practices queried

New property valuation standards have been called for to protect investors from being misled on the value and profits of property companies. The Property Management Institute has argued for more independent valuations to insure against the “dangers to the investing public of valuers’ basing valuations of properties on income and expenditure figures supplied by owners instead of from auditors.” “The increase in the number of public property companies listed on the stock exchange has made essential that certain standards be adopted to protect the investing public,” said the institute’s president, Mr W. J. Goston.

Expressing concern within “property circles,” the institute would seek discussions on the issue with

the New Zealand Stock Exchange, the Institute of Valuers, and the Society of Accountants, he said.

Newly listed companies had either purchased properties from founding directors or from companies associated with them, or invited subscription in enlarged existing companies, Mr Goston noted. In each case, the value of properties and of expected returns was critical for those deciding whether to invest in the companies.

The institute was concerned that independent valuations which investors were entitled to “may not be in fact properly independent.”

Mr Goston also pointed to the practice of assessing property values by establishing net returns from the property and applying an appropriate annual percent-

age return to them. Some valuers used as a basis for this information supplied by the property owners.

“Unless the income and operating expenses used by the valuer as his basis of valuation are properly verified by independent audit, the danger exists that the investing public could be misled as to the value of the company and its profitability,” he said. He cited a property company float last year. The prospectus presented operating expenses appropriately qualified having been supplied by the owners, but significantly different from the “actual” operating expenses that could be deduced from audited figures set out elsewhere in the document.

“We are not suggesting anything illegal in this instance and there may well

be a satisfactory explanation. However, neither the directors of the company, the valuers nor the auditors, gave any explanation in the prospectus for such a discrepancy,” Mr Goston said.

He said valuers were not liable for any incorrect values on properties where they had qualified their valuation as to the basis and source of information used. Further, directors could claim that correct audited figures were presented.

The institute wanted valuers to make assessments with the source qualification and to make “positive checks with auditors, and directors to explain any discrepancies in prospectuses.”

The Stock Exchange’s executive director, Mr R. B. W. Gill, said yesterday that the exchange was prepared to meet the institute to

discuss the issue and decide if a need did exist for some requirement in this area. However, it was up to professional bodies to correct practices resulting in the presentation of incorrect or inappropriate information. “As far as the Stock Exchange is concerned, we will accept an auditor’s written report if it is done to the standard of the society,” he said.

Mr Gill said that even the Securities Commission accepted valuations done by those who were not professional valuers — provided a relevant qualification was added. It was then up to people to judge for themselves the worth of a particular valuation in the light of qualifications attached.

The senior research officer of the New Zealand Society of Accountants, Mr C. N. Westworth, said that organisation was also pre-

pared to discuss the matter. “We are critically interested in the valuation of properties and would like to ensure that it is done properly and sensibly,” he said.

Accountants and auditors had to make sure information on valuations in prospectuses and other documents was properly prepared and took regard of a property’s location and condition and other relevant factors. They were not responsible for how specifically the valuation was arrived at.

The society is already moving to bring in a new standard on valuations. Its draft standard ED29, submissions on which are now being studied, is intended to ensure valuations are tied to market values for property and that gains or losses on property are included in the compi-yu’, profit and loss acounts.