A Chartered Surveyor’s View on Valuation

Today’s Irish Times carries an interesting article by Eoin McDermott, a chartered surveyor, on the issues relating to valuing property assets.

38 replies on “A Chartered Surveyor’s View on Valuation”

As a chartered surveyor, Eoin McDermott makes a worthwhile contribution to the debate.

At the Oireachtas committee hearing yesterday, auctioneer John Mulcahy, illustrated the danger of property people making valuations based on multiple assumptions, as Karl Whelan has previously noted.

Using a seven-year time horizon, without reference to experience in other developed country markets, would be ridiculous.

Irish real houses prices in the seven year period 1970/76 rose 6 per cent.
Oil prices were quadrupled in late 1973 and inflation jumped to double-digit levels.

In Ireland in 1978, real house prices were up 34 per cent compared with 1970.

This wasn’t part of a normal business cycle but a public spending fuelled boom that resulted in a budget deficit of 17.6 per cent in 1978 – – a record for developed countries according to the IMF, for the period 1970-2008.

Following a trebling of the national debt by the early 1980s, the payback cycle began.

Irish property prices began to recover in 1988 because of greater domestic control of public finances and crucially, the positive international environment.

The property people are not likely to be versed in international economics, but Ireland’s main economic partners are saddled with debt, while the age
of high leverage and days of easy credit will not be replicated soon.

The assumptions can always be found to meet a desired outcome and the history of judgment and willingness of Irish insiders, to sail against the conventional wisdom, is simply lamentable.

House price data from 1970:


The article is enlightening in as far as it goes, although I have to say that market value, as well established as the concept is, is not very precise or scientific in times of turmoil. Indeed, one may have a better chance of getting a more accurate LTEV than an accurate current market value.

Following on from Michael Hennigan’s point:

It also needs to be noted that what is happening to the global economy, including the “scarring” of economies and reductions in output capacity make this different again to comparable crises in other developed economies.

The backdrop of a long and difficult international recovery and the partial decoupling internationally of recovery in growth from recovery in employment surely mean that there is at least a risk of the property market being depressed for longer than statistics from 1974 to 2000 might indicate. This is why risk sharing is so crucial.

The fact of the matter is that markets and valuers and economic valuers have been unable to give credible explanations of the real value of anything (including money itself) for a long time now. Whilst this will bed down it is not clear which side of the bed it will settle, i.e., eurozone deflation or eurozone inflation.

I think we also need to realise that we need to offer the banks a fair price to get them to participate. The ECB says we cannot give “inappropriate” incentives but it is clear that the scheme itself must be attractive to privately owned institutions. This is particularly so in Ireland, compared with the rest of the Eurozone, with our common law and constitutional history of strong vindication of property rights.

The question then arises as to how close we really have to get to LTEV to make the scheme attractive to the banks who must be anxious to return to healthy trading in a healthy economy ASAP.

Whilst we can all debate propert prices until the cows come home, as we have been obsessing on them for years now, it appears to me that the debate is not sufficiently informed to allow us to second guess the banking valuations of LTEV’s of loans. This is regrettable as time is getting short.

It’s worth noting that the biggest bubble in Ireland took place from c 1974 to mid 1980s and then collopsed. The prices reaced them weren’t reached until our recnet bubble. So to talk about experience of over 40 years is comparing bubble to bubble.

I would really like to read some professional input on the importance and size of acceptable yields in the context of property valuations (residential and commercial). I have asked Mr. McDermott for his opinion by e-mail and will report any answer I get. I would love to know what yields are today and what acceptable long term yields are deemed to be.

My view is that yields must play a crucial part in future valuations and they are key to any objective measure of current and future property value, especially because this measure sits outside of the very subjective sentiment factors. My hunch is that this will not make pleasant reading to the government or banks.

“My view is that yields must play a crucial part in future valuations and they are key to any objective measure of current and future property value”

Totally agree. You can rent a 4 bed house in Tudor Lawns Foxrock for €1700 per month as advertised on daft.ie. That’s €20.4k per annum. I understand a rule of thumb is to multiply by 14 to get 7% yield means the house should sell today for €286k. When we were buying a house Tudor Lawns was out of our reach selling for c€75k in 1987. 20 years then and the house has increased nearly 4 fold. Still quite a big increase.

A 4 bed house in Tudor Lawns is advertised for sale at €630k on Daft.ie. This is presumably a “depressed” price according to estate agents and yet if this were correct the yield would be a mere 3.2%.

Didn’t John Mulcahy say he was a property bear when he saw yields drop to 3%?

According to the above this house should drop by another half.


To state the blindingly obvious – the FG policy is both cheaper to the taxpayer (as shareholders and subordinated bondholders bear more of the losses) and avoids the valuation problem.


No offence, but I consider the FG approach to be a mirage which not even FG expect to be able to implement if a general election is called tomorrow. Labour do not support the FG proposal. That is why I am not wasting time examining it in detail. And, before somebody accuses me of it, I am not saying there is no alternative. I am saying there is only one alternative – Nationalisation.

If ever it becomes relevant to cost the FG plan then we will have to take the entire potential cost to the real economy of delays or uncertainty caused while the plan is put into effect. I don’t see that day coming though.

It is becoming clear that outsiders valuation of current property prices will not be taken on board by this goverment.

If we except that, then the only possible influence left is on the risk sharing aspect that this blog, and now the ECB has highlighted.

Under normal circumstances, a transaction between a seller and buyer of a portfolio of loans at an agreed price would involve a straightforward 100% payment.

However, these are not normal times. The suggestion, put forward by Prof. Honohan, doing the rounds at the moment is that Nama may hold back payment of between 10 and 20% of the agreed price.

Can there even be justification for this?

Surely, by now, every bank looking for cover under the Nama umbrella must know the actual figures relating to non performing loans.

As an example, lets say AIB or BOI was expecting loan repayments of 800 million in 2008 from a certain group of loans that are no longer performing.

Presumably they made those loans on the assumption that an annual expected repayment of 800 million made good business sense.

Why should Nama compensate them to any more than that. Why give the bank 800 million now for a revenue they did not expect to collect until say 2011 or 2012?

Nama, the taxpayer, at most, should only be making up the shortfall in expected revenues on a yearly basis.

If their forecast yearly revenues on loans were good enough to allow them make a profit and maintain liquidity, then that should be all they need now.

If we are to bailout the banks then it should be in discounted yearly installments. That way we can keep the banks on a tight rein.

Michael Harvey: “Why should Nama compensate them to any more than that. Why give the bank 800 million now for a revenue they did not expect to collect until say 2011 or 2012?”

Because, if we don’t compensate the banks then it is no more attractive to them to enter NAMA than it is to remain zombified until 2012. This may not hurt the banks but it will surely hurt tax-payers and those dependant on their tax and their incomes.

I am not suggesting not compensating banks. I am saying it should be done on a yearly basis. They will be the ones who will be managing the loans on Namas behalf. If they are compensated up front, then there is not a lot of incentive for them to give a fig.


In deciding on the valuation methodology and the portion of the value to be paid up front a balance needs to be struck between (i) cleaning up bank balance sheets credibly and definitively so they can recapitalise and lend, (ii) protecting the taxpayer against NAMA losses, and (iii) incentivising the banks to work out loans.

I am not sure that an annual payment which could be withdrawn would satisfy (i) above.


Typical FF response – the only alternative is the one espoused by your LP soulmates – Bertie one of only 3 socialists in the Dail. You just can’t bring yourself to contemplate an FG policy working, though your party weren’t so peevish in 1987.

Take a little time and read Richard Brutons’s article in last Friday’s IT.

@MOL and Zhou

How about we ease off on the political stuff? I’m reliably informed that there are other internet forums out there where followers of political parties kick metaphorical lumps out of each other all day long. I’d prefer if we could steer clear of the kind of stuff here.


I have read the article more than once. I also commented on the FG policy when it first came out though I understand from Andrew McDowell’s comments that it has undergone a lot of refinement since then. I am sorry if you think my response is typical FF but life is short and the FG policy has no chance of being implemented other than (i) in a parallel universe or (ii) in part only after the introduction of NAMA or nationalisation.

I gave credit to FG for coming up with a policy and for engaging with the Govt on NAMA. In fairness to FG they do not have access to the resources or information which the Govt has so one cannot demand perfection from them.

However, they have received no support or endorsements from anyone of note, and (with only a brief reading) I do not see how their proposal could be given anything other than a 10% chance of working smoothly and effectively even if FG were in power on their own with an overall majority.

The tasks they set themselves are so outrageously difficult from an administrative and legislative point of view and so uncertain in the effect that they will have on the real economy that I think they would be forced to nationalise everything after a few weeks. On my brief understanding of the magic bank proposal I see those tasks as follows:
(i) set up a new bank and capitalise it
(ii) utilise the existing banks branch structures
(iii) force the existing banks to split themselves and deal with bondholders
(iv) change banks so they are not systemic and
(v) provide for winding up of AIB/BoI if necessary.

The FG proposal is attractive if we could be confident it could work. However, nobody of note outside of FG has confidence in it. On top of that the time to get started on implementing it has long since passed. On top of that Labour have not endorsed it and have not even been asked to endorse it by FG. Don’t shoot the messenger.

@KW – just saw your post now. Feel free to delete my post or move it to the TINA discussion you opened previously. I’ll leave off as requested.

Brian Lenihan made it clear in his Oireachtas evidence on Monday, as reported in today’s Irish Times, that it is not the property whose long term economic value is to be taken account of when valuing the loans (See Eoin McDermott’s first line) it is proposed NAMA purchases should the draft bill be passed.

Mr. Lenihan was quite transparent on this matter when he stated: ‘The loan (i.e. not the property itself) will … be priced … to calculate its long-term economic value.’.

More worryingly, perhaps, than valuing actual real property by reference to its ‘long-term economic value’, NAMA, according to Mr. Lenihan’s evidence, proposes to decide the price of the loans it buys via an extremely convoluted methodology open to so much dispute and controversy one is left wondering is the Government inviting complexity in order to combat the possibility of transparency.

This convoluted methodology goes something like this, according to Mr. Lenihan: (a) the long term economic value of the loans will be calculated after (b) the mark-to-market (i.e. the actual value of the loans were, say, a foreign venture capitalist to propose buying them from our banks) is calculated, which is itself calculated after (c) an adjusted valuation of the property that secures the loan is calculated, which adjustment takes place after (d) consulting various CSO statistics, which consultation is done only after a previous adjustment that (e) ‘reflects the fact that the market for this security is currently illiquid but will not remain so’ and after an initial calculation as to the value of the actual real property that is based on (f) ‘recognised red-book valuation standards’.

Surely the price paid by the venture capitalist for a bad loan will reflect his expectation of the current and future value of the realisable security? Is not the the LTEV based price of a bad loan the amount which is recoverable from the LTEV of its realisable security?

I would focus on this line from Eoin McDermott’s article:

“Conventionally, chartered surveyors undertake valuations using a “mark to market” approach.”

I believe Mr Lenihan referenced rental yields being high as a sign that the bottom is within reach :). Perhaps he should also accept that rent is variable. Where sitting tenants are tied to leases, the rents are sticky. Where turnover is happening, rents are tumbling. There are more retail/office/residential properties than tenants. What are current vacancy rates? Vacant buildings tend to have low yields. Then add to that more supply that NAMA will sit on. And maybe consider the wider economy, and we may start to get somewhere on valuations.

@bill hobbs

Apparently not. It appears that LTEV of bank assets will be substantially greater than LTEV of the realisable security. It is not clear what assumptions underly this calculation.

However, it is interesting to question whether we should be factoring in an LTEV once or twice. LTEV_Sec and LTEV_Loan are the two increases in value.

Mkt_Val_Sec + x = LTEV_Sec
Mkt_Val_Loan(LTEV_Sec) + y = LTEV_Loan

Should it not be the case that
Mkt_Val_Loan(Mkt_Val_Sec) + y = LTEV_Loan
because ‘y’ already assumes an amelioration of crisis conditions.

Accordingly factoring in ‘amelioration of crisis condtions’ twice will lead to errors?? 😉

Does anyone have thoughts on this aspect of the pricing scheme — from the Minister’s statement yesterday

The loan will then be priced by reference to NAMA’s cost of capital to calculate its long term economic value.

Thus the choice of NAMA’s cost of capital seems critical. If they set it on the low side, these loans presumably have far higher value when they’re discounting future values or revenue streams. But then the banks are getting the benefit of a cost of capital that they could never access themselves.

Point noted – but my tactic elicited a reasoned response.

You (or BL?) previously praised Zhou as an apostle of NAMA for keeping up a pro-NAMA presence on this website. His style is normally jesuitical. I wasn’t just going to lie down and be blown off by the assertion that there is only one alternative to NAMA, namely nationalisation.

If someone doesn’t keep the agenda of the biggest political party in the land under discussion, then why have any discussion.

We may not have a line of people endorsing our plan, no group of 20 or 46, but that is just an argument for group think, the type of consensus that got us into the corner we are now in. I see few detailed arguments against the principles of our policy.

If my posts are too overtly political, I will desist.
But this whole question is wrapped in the highest of politics.
The concerted reaction over the last few days shows you that these people are playing for the highest stakes. I think you will agree that my posts here argue from an economic point of view but with a political edge.

And just to add some spice, I think the exchanges centred on AA and BL would call to mind black images of pots and kettles.

Thank you for taking the time to reply in detail.
Yes the FG policy is a big ask, but it is the only one that sets out to answer the key questions.
How do we allocate the losses causes by the party going on for a decade after it should have stopped in a way that risk capital suffers before taxpayers?
How do we produce a mechanism that will encourage new lending to be made available?

It is not a policy founded in vapid ideology (LP) or defence of vested interests (FF), just one that seeks to do the best for the country.

And it avoids the valuation problem.

NAMA is in my personal best interests even after stripping out the costs I will incur as a taxpayer. Looking at the politics, I expect that NAMA will be passed – that is why my beneficial interest in BoI remains unsold. But that doesn’t make me very happy.

More over the clock is running against FG as the banks have been able under the shield of the guarantee to overpay some of the subies to turn an accounting profit that reduces the cushion that lies between the taxpayer and the 30-60 billion in unrealised losses out there. Talk about a perverse use of the legislation – a perfect example of (I hope) unintended consequences.

And Anglo are at the same game where a simple wind-up would have meant that the subies didn’t get a penny of taxpayers money. A policy that could only happen in a country where Anglo is prepared to advance money to complete it new HQ.

Any thoughts on an appropriate discount rate for an NPV of the long term economic value?

What would that do to Mr. Mulcahy’s 80-90 percent after 7 years (not that I accept that he is right)?


I think this could be a major issue that you are flagging.

Not only is it a cost of capital that the banks cannot have access to. It is a cost of capital that the Irish government does not have access to outside the wacky strangely-incentivized world of NAMA.

In any cas, NPVs of rental income flows are incredibly sensitive to required rate of return (or cost of capital). If I was looking for clever ways to get the price up, this would be the best place to hide it without people realising.

Arrgh. I guess I should write something longer to explain what the above actually means but I don’t have time\energy\heart\tolerance to do so now.

“LTEV_Sec and LTEV_Loan are the two increases in value.”

Of course you mean “..increases or decreases” since as has been pointed out on this site many times, these values are at least as likely to decrease in the long term.


Lenihan to the Committee “To clarify, Mr. Mulcahy has indicated that an historical analysis of the data indicates increases of 80% or 90% from what the figure was in the trough. I assure members that the valuation provision in this legislation will not permit that type of increment from the basic market value. That is an important point. The allowance for long-term value is circumscribed by a statutory formula which includes a reference to yields and Government bonds. It is a far more restrictive formula than an historic analysis which suggests every trough is necessarily followed by an increase of 80% or 90%.”

Accordingly, it seems that the bonds are a circumscribing factor rather than a factor which may increase. If rates are lower then they may not circumscribe as much but it will not increase the value.

@Aidan McGrath

Actually, I should have said x and y were the increases. I was talking in terms of what the legislation says. The legislation does not provide for a reduction of the Market value to take account of LTEV for the abvious reason that banks would not voluntarily sign up to sell assets at less than their market value.

LTEV_Sec and LTEV_Loan


Let me start by saying that I didn’t mean to second guess you there so don’t fillet me if I have this wrong.

My point was that I understood the Minister’s above comments in relation to property valuations (different to loan valuations which you refer to) to say that there will be a factor by which the normal LTEV would reduced or circumscribed below historical trends and that such factor would be based on a formula which referenced Govt bonds. It might be clearer when the draft regulations are published when the bill is introduced to the Dail?

as I see it that implies that the value will be set to make the bond pricing work. Which will be set to make the banks haircut low. ?

Subject to what KW may say with his extensive banking experience, I think we may be groping in the dark until the draft regulations and the formulas to be used are published.

If I remember correctly Minister Lenihan set up a straw man which he then proceeded to destroy. Usual smoke and mirrors don’t equate to analysis worthy of discussion.

I am absolutely amazed that while Minister Lenihan couldn’t tell us the cost of NAMA, he wasn’t able to give the detail of the valuation formula.
After all, this is by far the most important detail, isn’t circumscribed by commercial or client confidentiality and presumably with 16 days to go has long ago been decided.

He was groping in the dark alright, but I can’t imagine why he couldn’t tell us.

“The allowance for long-term value is circumscribed by a statutory formula which includes a reference to yields and Government bonds. It is a far more restrictive formula than an historic analysis which suggests every trough is necessarily followed by an increase of 80% or 90%.”

What is this “statutory formula” – is it in the draft

As I understand it, John Mulcahy is, like Eoin McDermott, a chartered surveyor, not “an auctioneer”.

Also, he referred to yields on Grafton Street, i.e. retail property, dropping to 3% as a bear signal. The comparable yield for the residential market might be different.

But yes, I found his testimony worrying in some respects.

Specifically, I was bothered by his confident assertion that the property market had troughed (though in context this could be seen as a reference to development property, less contentiously) and also his rather glib survey of recent property market cycles – I tend to see the current market in “Black Swan” terms with house prices still very exposed on the down-side.

There’s one interesting sentence here from John Mulcahy’s statemens. I’m quoting the entire paragraph first and then pulling out the sentence.

“I was asked how the valuation process is to be executed. I am not in this on my own. HSBC is on the banking side. We did not start off with headline values of loans or property but decided it was better to start with where we are today and put in a solid foundation. This is done by requiring the covered institutions to obtain an independent valuation of the underlying security. We have defined an “independent valuer”. It must be an external valuer within the meaning of all the valuation standards. We then set out in detail what must the be the qualifications of the valuer, the template he or she must use to arrive at value and all the elements that go into it. In some cases, these were not in place when the initial valuations were carried out some years back. Therefore, we set out prescriptively what must happen to ensure verification of detail in every way.” was he suggesting that valuations were not as robust as they should have been – if so then it directly contradicts the Ministers 75% LTV assurance.

“….In some cases, these were not in place when the initial valuations were carried out some years back….”

was he suggesting that valuations were not as robust as they should have been a few years back-

Example: Loan issued 2005 @ 75 to buy property worth 100 say cmv 100 ltv is 75%.

further loan issued 2007 @ 150 to buy property say cmv 150. First property revalued at 150m

Total loans say 225 secured by property cmv 300 LTV =75%

Apply the Mulcahy observation to the cmv provided on the first property in 2007. Now imagine a series of loans each one cross guaranteed by ecsalating cmv’s – borrowers equity is the net equity available within his/her porfolio.

@ Fergus

You are exactly right. The testimony was worrying re the trough, his selection of cycles and trends should exclude 2000 onwards due to the irrational exuberance of lenders / developers and I estimate at least a further 20% fall in resi property prices (though my opinion is worth little as a non expert) for many, many reasons that I won’t bore anyone with!

One wonders if Oscar Wilde had auctioneers and valuers in mind when he quipped that “nowadays we know the price of everything and the value of nothing.” Certainly the National Asset Management Agency will need to reflect on the valuation practices of auctioneers and valuers if they are serious in addressing their fundamental objective of maximising the return to their shareholding taxpayer. At some stage in the future NAMA will want to raise the most money it can from selling the assets under their control, mindful that they will lose money if they undervalue their assets. Similarly, potential purchasers will be concerned about asset values because they don’t want to pay more than they are worth.
Predicting how much purchasers will be willing to pay for those assets is tough. Investors in assets of all types use a variety of techniques to value the assets they buy. They will try to assess which asset has the greatest potential for gain, assess the risk factors involved, look at accounting data and assess where the market is heading. Scientific valuation precision is nay impossible because valuation is both art and science.
Nevertheless despite the limitations of assessing scientific value, going back to first principles is an appropriate starting point. What is relevant is intrinsic value. The intrinsic values of all assets are found the same way. The current intrinsic value of all assets is the expected cashflow (not profits) those assets will generate both now and in the future. What these assets generated in the past is of no consequence to their current values. Unfortunately this is the main weakness of accounting based valuation methods, such as profits methods of valuation, because such methods are, by definition, historical. Indeed the Mallison Report which was published following the UK property market crash in the late 1980s, suggested that one reason for the overvaluation ‘bubble’ was auctioneers and valuers using historical (comparable) evidence to estimate current values. However, if future cashflows based on economic values are declining intrinsic values can lie considerably below market price. This is the classic property asset bubble which we are now experiencing.
Unfortunately, by adopting accounting values and not economic value, auctioneers and valuers contribute to property market inefficiency. The reaction to this global financial and real asset meltdown is for tighter regulation. But the difficulties now being experienced in global asset markets are not new– it’s just that it is much bigger. The common denominator is accounting based valuations.
It may be a tad unfair to practicing auctioneers and valuers to criticise them for slavishly adhering to this method of valuation given that their bible, the Red Book, takes its cue from the international accountancy standards. Perhaps the solution, in addition to tighter regulation, is a move to long term economic value, which, thankfully, is what NAMA is alluding to.

Appraising commercial property is composed of several methods of valuation. The dominant valuation method used is the income approach using terminal value. The price paid is a reconciliation of the income approach and other valuation methods. But sometimes assets will sell for amounts other than the present value of expected future cashflows because not everyone can agree on what the future cashflows are going to be. Competition for valuable assets will lead to price adjustments which are the best estimate of what the asset price is. The assets will sell to those investors who see the least risk and/or anticipate the highest cashflows. But here lies the heart of the problem.
Remember the objective of valuations (to avoid asset bubbles) should be to find a market price that sits comfortably with intrinsic value. There are two important inputs here. First, cashflow expectations should be based on realistic economic forecasts. Sadly this is not always the case. For example, looking at the balance sheet of Anglo Irish Bank the net asset value (book / accounting value) of their commercial property portfolio is circa €4.5bn. If you were to believe this you believe in the tooth fairy. Clearly the valuations placed on those commercial properties, now being acquired by the taxpayer, expected these properties to generate wholly unrealistic cashflows. Again this violates first principles in financial economics – the GIGO effect – garbage in garbage out.
Secondly, in addition to having realistic cashflow expectations, the risk attached to those cashflows is paramount. This risk is reflected in the discount rate. Inter alia, how these commercial properties are funded determines the discount rate. In the valuation of these commercial properties gearing levels of 80% was not uncommon. The principle characteristic feature of debt is its fixed income repayment regardless of the cashflows. This substantially increases the commercial property’s financial risk. Was this adequately priced into the valuation? The evidence would suggest not. Furthermore, valuers must come to use an appropriate cost of capital instead of simply relying on the cost of debt. Again the reason for this is that valuers take their cue from their accounting cousins who simply deduct the cost of debt in arriving at a profit figure and ignore the biggest cost of all – the cost of equity, which of course is included when teasing out economic value.
The taxpayer will become NAMA’s biggest shareholder and maximising the shareholders long term economic value is the primary goal. To do this it should avoid bad valuation practices. The valuation method used to value the target assets should be the economic equity residual method. This method assesses the residual free cash flows (FCFs) left over for the acquiring company’s shareholders – the taxpayer. Maximising these FCFs maximises the taxpayers return.

The valuation profession needs to return to basic economic theory that will inform them of how to undertake competitive market analysis using pro forma cash flow analysis, its economic drivers and investment risk in assessing property values.
Relying on valuers “intuition” is not good enough.

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