the level of adverse impact each stated aspect has, or (based on
information that is common knowledge and/or readily ascertainable in
the market and reasonably foreseeable events), in the near future,
might have on the property's value and marketability. Each risk
rating is presented in a combined numerical and graphical format
aimed at providing a bold, clear caution indicator to the lender. In
the case of higher level ratings, it also provides an indicator of
the presence of relevant comments in the Additional Comments' section
on the following page .
Ratings under propertypro
focus on four property specific aspects and four market related
aspects. Each of these aspects can involve consideration of a range
of elements relative to it. Any other significant risks identified,
which do not come under these aspects, should also be commented upon
in “Additional Comments' .
A HIGHLY TECHNICAL ANALYSIS
not intended that the valuer would conduct a highly technical
analysis. Provided the valuer has adequate experience in the type of
property and the particular market, reliance may be placed on up to
date, broad knowledge of the dynamics of the market in which the
property is situated. Otherwise, a valuer with that experience should
supervise the valuer's work or sufficient research should be carried
out to provide an informed opinion.
OF ADVERSE IMPACT OR RISK
is accepted that each aspect is likely to have some possibility of
adverse impact or risk, however low or nominal. Therefore, low or
nominal adverse impacts or risks are rated as "1" and are
graphically depicted as a short bar.
adverse impacts or high risks are rated as "5" and are
graphically depicted as a long bar. The ratings are approximate only.
It is not intended that ratings be given other than in whole numbers
ratings which are outlined below the bar graphs are:
Low to Medium
Medium to High
Risk Ratings of 4 or 5 or the existence of three or more "3"
Risk Ratings MUST BE EXPLAINED in the "Additional Comments"
section. Ratings of "3' or below may be commented on.
the purpose of these reports, the risk rating reflects:
- the level of adverse impact the stated aspect has
upon the current value and/or marketability of the security property,
- the currently perceived
level of adverse impact the stated aspect could have on the value or
marketability of the security property within the initial 2 3 year
period of the security .
impact in relation to a property can arise from such things as:
- where it is and what it is near or not near
- what it is subject to or does not have the benefit of
- what it does not provide but the market expects
- what defects it has
- what external controls it is subject to its micro and
macro economic environment.
- the dynamics of the local real estate market
- the specific dynamics of its market segment
- the number of possible factors would be extensive, so
no attempt is made to list them all here .
extent of the impact needs to be seen in terms of the local market
and the effects on marketability and value. What may cause a
significant adverse impact in one market may have low impact in
another. The extent of their individual adverse impact can vary
significantly, so no attempt is made in this memorandum to provide a
standard grading for various impacts .
AND FAVOURABLE IMPACTS OFFSET
rating adopted for each of the listed aspects requires a balanced
overview for that aspect. Properties often have many beneficial
features. Adverse impacts need to be weighed against strengths or
favourable impacts under the same aspect.
When considering the aspect 'Location & Neighbourhood', a
significant adverse impact may result from being adjacent a petrol
station. However, across the road is parkland lined with Norfolk
pines and beyond that a surf beach, all of which can be seen from the
subject property. In the local market, the benefits of the latter far
outweigh the adverse impact of the petrol station and the overall
rating adopted is "2" Low to Medium .
ON HIGH INDIVIDUAL ADVERSE IMPACTS
valuer is not required to provide additional comment for overall
ratings below "4". However a comment would be warranted on
a significant adverse impact (that individually would rate "4"
or "5" but is off set by strong beneficial impacts in
the same aspect to produce an overall rating below "4") .
there can be offsets in the overall rating for an aspect heading such
as the above, there may also be cumulative effects from several
adverse impacts. For example, the location may be 10 km from the CBD,
there are no neighbourhood shops nearby and properties nearby are
generally old and poorly maintained. Individually these might be
rated at "2", but the cumulative effect may warrant a
rating of say "4" for the 'Location & Neighbourhood'
aspect overall .
KNOWLEDGE AND REASONABLY FORESEEABLE EVENTS
basis of any "forward looking" element of a rating is
restricted to information that is currently common knowledge and/or
readily ascertainable in the market and to events that are reasonably
foreseeable. Information which is "privileged" cannot be
reflected in the rating .
OF HIGHER LEVEL RISK RATINGS
level Risk Ratings of 4 or 5 do not necessarily mean that a property
is not suitable security, though they may influence the lenders'
decision on the amount loaned or the LVR
ratings themselves do not reflect the intended level of lending, as
this is a decision for the lender.
Rating reflects an overall rating for these two aspects. Refer to
comments below in section 4 of the report for details on 'Location
The neighbourhood is on the fringe of town, very near an area under
investigation for rezoning to industrial use and is considered likely
to result in a change of zoning to industrial. This possibility has
not had any significant impact on prices at this stage.
likelihood of a change to the neighbourhood is seen as posing a
medium to high risk of an adverse impact on the value and
marketability of the property in the next few years. 'Location &
Neighbourhood' is given a Risk Rating of 4 and must be explained in
the "Additional Comments" section.
(INCLUDING PLANNING, TITLE)
in this instance refers not only to the land physically, but also to
access, services, planning and title.
land is steep requiring a particularly steep driveway. This is
considered to have a low to medium impact on the value and
marketability of the property and 'Land' is given a Risk Rating of 2.
No comment is required but nevertheless it may be provided in the
Comments section if not already noted under 'Site Description &
aspect of the Risk Analysis covers a range of environmental issues
including contamination (refer environmental Issues heading above).
property may be in an area mildly affected by a 1:100 year flood
event that may warrant a "3" Risk Rating for the current
adverse impact on marketability and value. In addition however; a new
jet standard airport is under construction nearby and the property is
under the flight path. This alone warrants a "Medium to High"
or "4" Risk Rating. The cumulative effect of this with the
rating for the flood situation warrants a "5" rating
overall for this aspect. Comment is required.
aspect refers to all improvements, whether the main building or
ancillary improvements (and for a TBE Proposed Dwelling,
Extensions or Renovations, would include concerns about aspects of
the project or tender).
There may be evidence of old, minor White ant damage that justifies a
pest report as a precaution. White ants are known to be a common
problem in the general neighbourhood. A Risk Rating of "4"
may be warranted pending a satisfactory report (requiring comment).
There would obviously be an on going risk which in itself may be
rated at "3" and may warrant a recommendation for an annual
pest inspection report.
A 1.8 metre high retaining wall beside an in ground pool is
badly cracked and has bowed out considerably. A neighbour's garage is
close by and could be endangered if there is a collapse. This has a
significant adverse impact on the value of the property due to the
cost to make good and the risk that it could collapse beforehand,
taking the neighbour's garage with it. Due to the potential
seriousness and urgency, a Risk Rating of "5" may be
warranted (requiring comment), and a recommendation for an engineer's
again, the improvements ray not be in keeping with the expectation
for the locality. This could increase the risk by reducing its
marketability and increasing the selling period.
VALUE NEXT 2 3 YRS
Risk Rating is an indication of the level of risk of this property
reducing in value over the next 2 3 years. It is a
forward looking summary rating taking into account aspects
affecting, or likely to affect, the value of the property. The
assessment is made on the basis of information that is common
knowledge and/or readily ascertainable in the market and having
regard to reasonably foreseeable events as at the date of the
rating cannot be expected to reflect information that was not common
knowledge, or conditions, events or circumstances that occur
subsequently or unexpectedly.
aspect reflects the risk of the market changing direction rapidly and
having a significant adverse impact on the value of the property.
While this will reflect historical performance, reasonably
foreseeable events should also be taken into account if they are
likely to change the pattern of volatility.
An area has tended to experience moderate "boom bust"
cycles. It may warrant a Risk Rating of 4 if the next "bust"
could happen in the next 2 3 years (which must be explained in
the Comments section). The more severe the likely bust could be and
the sooner it might occur, the higher the risk rating. Prospects of
an imminent, sharp and severe bust could be a "5".
aspect reflects the extent to which a significant change in the local
economy is impacting adversely and/or the risk that it may impact
adversely on the value of the property in the 2 3 year time
a small town, there may be the prospect of a major business or
industry closure or downsizing, though it has not been confirmed or
happened yet. A Risk Rating of 4 may be warranted at this stage
(which must be explained in the Comments section).
and related third parties should note that the global economy impact
on the Australian market generally is not addressed unless it
specifically impacts on the particular local economy. A market with
significant foreign investment could warrant a higher rating and
comment if conditions overseas meant foreign investors were starting
or likely to sell out or withdraw interest in the market.
aspect reflects the extent to which the condition(s) of the market
segment is impacting or may impact adversely on the property.
market for inner city medium quality residential units may
currently be strong, however a significant over supply is
emerging. A Risk Rating of 4 or even 5 may be appropriate (which must
be explained in the Comments section).
ANALYSIS – PROPERTY INVESTMENT
The IRR is a quick and approximate indicator of riskiness for property
investments. Other measures used for risk analysis include:
MONTE CARLO TECHNIQUE
This is a procedure to establish an expected NPV of a project based on
a probability distribution of all the potential project outcomes. It is
employed when the number of uncertain variables are too large for a
meaningful judgment about the real riskiness of the project to be
reached with the aid of sensitivity analysis. In
particular, the output will provide the mean (AVG) and standard
deviation (STD) of the distribution of NPVs - see diagram 1. In
addition, a cumulative probability distribution may be displayed,
showing, for example, that there is an approximately 25% probability
that option A's NPV falls below zero whereas the comparable probability
for option B is about 15% - see diagram 2.
OF THE NPV OF 2 PROJECTS
PROBABILITY OF THE NPV OF 2 PROJECTS
The main defect of the method is that variables which in the real world
are closely correlated will be uncorrelated in the simulation. One way
to overcome this problem is to aggregate variables (to include the
product or sum of the correlated variables) as the independent
uncertain variable in the analysis, rather than the correlated
variables. It is a matter for judgment whether the loss of detail which
this approach entails is a greater disadvantage than the potential
inaccuracy resulting from the independence of variables which in
reality are correlated. This is an example, of an important subjective
input into what is claimed to be an "objective" method.