Pandemic has changed the way we determine real estate prices
Real estate appraisal does not follow a standard methodology. Industry professionals often regard property valuation as more of an art rather than science. It is therefore unsurprising that consensus between transacting parties is not easily achievable. Even if appraisers arrive at a realistic valuation, they cannot substantiate or defend the value with facts. This leaves room for subjectivity.
If this is the long-standing modus operandi in real estate, then one can imagine what the pandemic brought into the mix. Reduced liquidity, lack of comparable sales data, and general economic downturn are posing challenges to appraisers. The methodologies, which were already subjective, are now more speculative in nature, relying on buyers’ sentiment and small data sets. In fact, most of the latest market data is from third-party sources, and revolves around supply-demand dynamics and outdated cash-flow assumptions. That said, appraisers are also witnessing a paradigm shift in the industry, especially between verticals, and in terms of preferences and fresh developments — which are charting a new course of valuation.
The post-pandemic appraisal
COVID-19 pandemic was nothing short of a revolution. Its effect will forever remain etched in the pages of history. It normalized remote working, increased online shopping significantly, and changed consumer sentiment drastically — all carrying implications for real estate. For example: In an industry survey by EY(1), 63% of respondents said they expect a significant decrease in retail real estate prices. Such widespread beliefs naturally translate to undervaluation of retail assets, which in turn will drive away institutional investors towards residential assets — which saw “no change” in valuation from majority of respondents in the EY survey.
The pandemic impact was so profound that digitization, which previously found resistance to wider adoption in conservative sectors like real estate, permeated every function of it, across the value chain. This development is of great consequence to the future of property appraisal, because it will quantify many grey areas across the value chain. It’s not the quantity of data that will be of value but the quality of it and its timely accessibility.
To begin with, data lag is the first line of barrier to efficient valuation. Unlike stock markets, where economic forces manifest in real time and corrections are made, real estate is a slow-moving asset class. And during recessions, lack of liquidity and cash-flows causes more delay. Now, with advancement in technology and increased reception to it in the industry, appraisers can avail current, accurate data to arrive at the most realistic valuation. This valuation will factor in both the current volatility and potential, future market conditions. Many leading innovators are leveraging AI and ML technologies to develop appraisal engines that analyze a wide range of factors, including demand, utility, scarcity, and transferability, among other concomitant variables.
Price valuation in the UAE
The impact of the pandemic on the UAE real estate has been par for the course. That said, the recovery has been considerably faster, thanks to efficient crisis management, world-leading vaccination rate, and many real estate-centric initiatives helmed by the government. According to Knight Frank’s UAE Property Value Movement Report(2), optimism is evident across real estate verticals in 2021. The value forecast for CRE is generally positive, whereas it is buoyant for residential segment.
But most importantly, the valuation mechanism in the UAE real estate has been technologically powered for some time, and with full government backing. Valuations are largely derived from data-driven indices, notably Mo’asher, Dubai’s official sales price index. This initiative has been instrumental in creating a transparent ecosystem for real estate transactions. Mo’asher(3), which was launched in cooperation with real estate portal Property Finder, provides real-time data on average sales price, rental rate, quarter-on-quarter change, etc. for each location and community, giving a common reference point for all stakeholders to transact from. During a time when finding valuation is getting more complex, such policy-led interventions have never been more necessary.