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Property valuations in a volatile economy

The questions audit & risk committees need to be asking

In the current uncertain economic environment where inflation has risen, monetary policy is responding and a range of other factors add to the uncertainty, the challenges of estimating property values reliably is amplified and directors play a key governance role.

General economic and market sentiment is something that is difficult to quantify but is generally a lead indicator of changing market conditions and is often an early indicator of a market transitioning from a growth phase to a contractionary phase or vice versa. There are some signs of a change in sentiment occurring at present, as we enter a new phase with higher interest rates, concerns around inflation and overall supply challenges. However, there are a range of different factors playing out that mean many assets may prove to be resilient. When the market enters a transitionary phase, there is typically a lag in transactional evidence and anecdotal evidence may be the only indicator of changing market conditions. The need for professional and well instructed independent valuations will become increasingly important during market periods where direct market evidence is less abundant and experience and judgement by the valuer will be increasingly important; governance from the board is equally important. In this paper, we highlight some of the governance questions directors and senior executives should consider when determining property values.

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