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Myanmar COVID-19 Brief Part 4: Valuation Uncertainty

Myanmar COVID-19 Valuation Uncertainty Brief

Introduction

In this edition of our series we are assessing the impact of COVID-19 on real estate valuation. The pandemic has instigated a period of material uncertainty across markets which translates to significant challenges when valuing real estate assets. This paper will look at the impact of COVID-19 on real estate values, analyse the key measures within the CERP aimed at stimulating the real estate market and explain the current climate from a valuation perspective.

Executive Summary

  • Economic stimulus package of the CERP targets increased liquidity and instigation of rapid economic recovery.
  • Government must focus on health, individuals and businesses to secure longterm sustainable economic improvement and development.
  • Challenges for asset valuation during a period of material uncertainty and its impact on real estate markets.
  • Increasing pressure on landlords to offer immediate concessions has potential for instant impact on values.
  • Accurate, transparent, internationally regulated valuation and reporting is essential during times of volatility.

Uncertain Times

We are in unprecedented times and the virus has impacted the global economy significantly. Although Myanmar has to date been relatively successful in containing it and has suffered limited casualties, the impact cannot be underestimated. Within the overview of their relief plan, the Ministry of Planning Finance and Industry has been succinct with its assessment:

“Myanmar has not, and will not, escape the economic consequences of COVID-19. Already we have felt its impact: disrupted supply chain and trade ows, falls in retail and discretionary spending, a near cessation of tourism, and an understandable slump in consumer and investment sentiment broadly.”

These are all major issues that have been highlighted and the entire economy lacks insulation from the wide-reaching effects of COVID-19. The Economic Relief Plan is a positive step from the government aimed at supporting the economy and the people of Myanmar with multiple immediate actions, imminent responses, and short-term goals to be completed either by the end of 2020 or prior to that. It is a wide-ranging coordinated response that if executed effectively will help to limit the impact of the virus in Myanmar. In her foreword to the Economic Relief Plan, State Counsellor Daw Aung San Suu Kyi states:

“This COVID-19 Economic Relief Plan seeks to mitigate the inevitable economic impact posed by COVID-19 while establishing foundations that will facilitate Myanmar’s rapid economic recovery, using all available policy instruments to the fullest possible extent, and as part of a coordinated whole-of-nation response.”

Success from the Economic Relief Plan across the economy will ultimately have a positive impact on the real estate market, but due to its very nature as an asset class, there will be a time lag before we witness its full affect and can be confident in assessing its implications. In a purely economic downturn, for example, residential price falls tend not to be fully integrated to the market until eighteen months after a stock market crash.

Assessing the current impact of COVID-19 on the real estate market in Myanmar is still a very challenging task. Valuation is particularly problematic, and we continue to follow global guidelines regarding material uncertainty.

Covid-19 & The Cerp

ECONOMIC STIMULATION AND THE IMPACT ON REAL ESTATE

Within the CERP there are several key initiatives aimed at supporting the economic recovery that will directly impact the real estate market and the current uncertainty we are faced with.

We highlight some important aspects from a real estate perspective:

  • Lower interest rates (10% for secured lending), improve the money supply by lowering the minimum reserve requirement (by at least 1.5%), and hold credit auctions to inject liquidity.
  • Allow more flexibility to the central bank fiscal deficit management to enable this whole process.
  • Provide funding at a low cost, primarily working capital loans focussed on micro, small and medium sized enterprises within the garment industry, the hotel and tourism sectors, and micro finance institutions. Capital of approximately USD 72 million available over one year with an interest rate of only 1% per annum. The total available funds can be increased to USD144-216 million depending on the response and need from the market and is designed to target the most affected townships.
  • Guaranteeing 50% of all bank loans to Myanmar companies who are not taking advantage of the working capital loans and on the condition that staff remain employed.
  • Annual fee waivers for the hotel and tourism industry.
  • Lease fee exemptions will be applicable for certain companies leasing state owned factories for a period of 3-6 months.
  • Ease the strains in the banking sector by increasing flexibility on prudential controls, providing opportunity for banks to assess risks more specifically on a case by case basis to maintain liquidity within the market.
  • Establish an Asset Management Company to deal with non-performing loans that can be set aside, potentially for 5-7 years, when the pandemic is over, and the market has recovered.
  • Promote investment and international trade. Fast-tracking existing large-scale investments from reputable international firms that have been held up.

Relaxing the banking framework, particularly in reducing interest rates and extending the repayment period for non-performing loans is a very important step of the CERP. Businesses are generally heavily indebted, and the interest rates in Myanmar are high, especially when considering other regional economies. Servicing business loans is a heavy burden and whilst facing the impact of the pandemic on trading it creates a particularly precarious framework. The banking sector in Myanmar is dominated by local banks and they are being asked to respond to this emergency. The government needs to stimulate economic activity and that requires increased capital flows. The CERP is aimed at addressing that in the short-term whilst also prioritising key longer-term development objectives.

Any positive impact that the CERP can have on the economy will translate into a positive impact on the real estate market. The crucial factor is liquidity and the goals of the CERP provide a framework for dealing with this. It is now essential that the execution is effective.

Valuation Uncertainty

PROMOTING INVESTMENT DURING COVID-19

With the increasing risk of uncertainty over the election at the end of the year, the government needs a successful, coordinated response and a rapidly recovering economy. The priority must be the safety of the Myanmar people, followed by economic improvement and enhanced economic development. But first, we will need to endure more uncertainty. Whilst the World Bank has downgraded growth forecasts, but at the same time still expects good regionally comparable figures, they believe Myanmar is well placed to recover but must focus on health, individuals, and businesses, and in that order. The success of the response is likely to dictate the appetite for elections and whether the current schedule is maintained.

Promoting new investment is a major focus of the CERP and FDI is a very important element of the macro-economy. According to the World Bank, FDI commitments prior to the impact of COVID-19 were in-line with growth forecasts but with the current inability to travel freely, those commitments could fall into jeopardy as investors are unable to enter the country and formally negotiate deals and seal contracts or agreements. Current quarantine measures are problematic. Personal relationships are fundamental to commerce, particularly in a country like Myanmar, and maintaining them with regular meetings is crucial. The priority must be public welfare and safety and although the measures create difficulties, the general expectations are that they will not have a significant long-term impact.

A major contribution to FDI in Myanmar comes from China and a large percentage of that goes into infrastructure projects – all of which require a significant amount of personal relationship development, site visits and client meetings. Fast-tracking significant infrastructure projects and expediating large investments by reputable international companies is a priority of the CERP and China is keen to use this as a tool to implement the next stage of major projects discussed during President Xi’s visit in January. New Yangon City, Kyaukphyu Deep-Sea Port and Industrial Zone, and the China-Myanmar Border Economic Cooperation Zone are all of strategic importance to China as a means of furthering their Belt and Road Initiative.

A cautious approach to such stimulus needs to be assessed as a long-term consideration rather than as a reaction to current events. Like any significant disruption, the current situation is creating opportunities for those in a position to take advantage of them, and it is essential that Myanmar secures long-term regeneration and value from any projects that are fast-tracked.

Valuation Uncertainty

Valuation is often said to be an art and not a science, referring particularly to the techniques employed to calculate the value rather than the concept itself. Valuation is the practice of estimating the price a hypothetical buyer would pay to a willing seller at a given point in time. It is an estimation of a price in the market and this estimation is affected by uncertainties. The degree of uncertainty varies depending on the level of activity in the market; the more activity we have, the less uncertainty there is. It is important to remember that uncertainty is not the same as risk. Risk relates to the potential loss incurred from an investment opportunity or venture whereas uncertainty refers to anything that is unknown within it. The International Valuation Standards Council (IVSC) has issued a technical information paper on valuation uncertainty that provides the following definition:

“The possibility that the estimated value may differ from the price that could be obtained in a transfer of the subject asset or liability taking place on the valuation date on the same terms and in the same market environment.” 

The paper states that valuation uncertainty can be broadly divided into market disruption, input availability and choice of method or model. All valuations have a degree of uncertainty and it is the skill of the valuer to identify, quantify and disclose these uncertainties wherever possible. However, there comes a time when the level of uncertainty goes beyond the norm and this is known as material uncertainty. The Royal Institution of Chartered Surveyors (RICS) provides additional commentary on matters that may give rise to material valuation uncertainty which can be summarised effectively with the following paragraph:

Markets can be disrupted by relatively unique factors. Such disruption can arise due to unforeseen financial, macro-economic, legal, political, or even natural events. If the valuation date coincides with, or is in the immediate aftermath of, such an event there may be a reduced level of certainty that can be attached to a valuation, due to inconsistent, or an absence of, empirical data, or to the valuer being faced with an unprecedented set of circumstances on which to base a judgment.

When considering the current situation in regard to COVID-19 and the implications of the pandemic it is reasonable to state that we are in the midst of such an event as described above and that the disruption being caused is creating material uncertainty. The RICS has been explicit that the current situation of material uncertainty does not mean its members are unable to value assets, rather it has directed that under these circumstances valuation provides a key function to support markets and stakeholders. They also confirm that valuations need to reflect the restrictions that material uncertainty brings. Whilst the decision to disclose or not disclose material uncertainty is the responsibility of the valuer, it must be explicitly stated in the valuation report if it is. The overriding requirement is that a valuation report must not be misleading or create a false impression. The valuer should expressly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation as at the specified valuation date. In a statement released by the RICS on 2 April 2020 regarding the impact of COVID-19 on valuation, it stated that:

“In considering the degree of uncertainty at a specfied valuation date, careful regard should be had to the level of activity in the relevant market and the existence, and degree of reliability, of recent or contemporary evidence.”

Ultimately this is always the job of the valuer, and whilst we would operate accordingly whatever the state of the market, the current situation is creating such severe volatility that it is paramount that full disclosure and commentary is provided. Now more than ever, accurate and transparent, internationally qualified and regulated valuation and reporting is essential. Valuation is an important skill that touches all asset types. In times of volatility, it is absolutely crucial. It is both a fundamental part of the financial system, establishing values underpinning the accounts of listed and unlisted companies, and it is key to risk management and decision making for loans and investments. If assets are valued incorrectly it can impact the entire business operation.

Real Estate Values & The Cerp

Lower interest rates would normally have a positive effect on the real estate market as cheaper access to funds and reduced costs on existing facilities encourages further investment. A rapid fall in stock market prices crushes liquidity in the real estate market and in the current environment, transaction-based real estate evidence becomes an unreliable guide to actual prices, which become largely hypothetical. In the absence of liquidity investors postpone decisions and owners tend to retain their assets.

Whilst tourism and hospitality seem like the obvious sectors to be affected, the overall impact on the real estate market is more difficult to establish. By its very nature it requires long-term decision making for significant investment in either acquiring or leasing a property. Because of the uncertainty in the market and the long-term nature of real estate investments, a lot of projects, investments, relocation, or expansion plans will have been put on hold and that must have an impact on real estate values. The full extent to which values are impacted due to a reduction in demand for assets will only start to be seen in the coming months as businesses and individuals react to the pandemic.

One of the major issues of this will be in valuing real estate assets and anticipating the future of the real estate market. We rely on transactional evidence and that is always lacking during times of uncertainty. Real estate transactions are not instantaneous, and there is a time-lag before a transaction completes. Understanding transactions that occur during the pandemic will be challenging. When valuing property we need to consider the current risk situation at the date of valuation, that is the variables that are a function of the wider economy, particularly market risk as a function of the local economy (expressed through uncertainty, demand and supply for premises), and legal risk (expressed through relevant regulations and laws).

Where a valuation requires a discounted cashflow approach, transactional evidence will not necessarily be a fundamental part of the assessment and a short-term reduction in values can be evidenced more transparently. Key issues that could have an immediate impact on real estate values are falling demand, and as a consequence, pressure on landlords to reduce their rental expectations, the pursuit of renegotiation of current rents by existing tenants, and the possible triggering or attempted triggering of force majeure clauses. All of which adds to the general level of uncertainty.

There is also uncertainty because of the CERP itself and we need time to understand the implications of the various measures, as well as the success of their implementation. Ultimately the major crisis of the pandemic is manifest in the uncertainty we are currently faced with. Uncertainty over our health, uncertainty of the future, the economy, and the real estate market.

Managing Uncertainty

We expect the current uncertainty throughout the real estate industry and across the whole Myanmar economy to continue. During these unprecedented times it is important to manage your assets responsibly.

We recommend:

1. Use professionally qualified valuers who are operating in accordance with international valuation standards. Slade Property Services is a RICS regulated firm and has multiple RICS qualified and registered valuers operating in accordance with RICS & IVSC regulations.

2. Regular communication between your property team, accountants, and valuers. Collaboration between these stakeholders will ensure accurate valuation reports prepared for the correct purposes, using the correct methodology and inputs, effectively minimising uncertainty.

3. Carry out valuations regularly in order to provide greater accuracy and a better overview of market fluctuations. Slade Property Services has a large team of qualified professionals operating in the market across multiple service lines. Working with our agency teams, we can provide accurate and timely reports to support your business requirements.

If you have a property that you wish to sell, have valued, or if you are in a position to take advantage of lower values and wish to buy property, contact us for a consultation.

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