Southern Cross Partners Blog

Skyrocketing valuations: Managing your investments

Written by Southern Cross Partners | Oct 27, 2021 2:18:34 AM

 

Despite a country-wide lockdown and Auckland still facing some of the tightest COVID-19 restrictions in the world, house prices are still rising both regionally and nationally.

The latest QV data reveals that national house prices increased 26.3% year-on-year last month, with the average value increasing 3.6% during the last quarter.

The national average house price is now sitting at $977,456. In Auckland that figure skyrockets to $1,391,598.

These valuations don’t seem to be softening, but rising valuations do pose a risk. So, it’s crucial that we take steps to mitigate these risks, as much as possible.

It’s more important than ever that Southern Cross Partners continues its conservative lending approach to ensure we make the best lending decisions.

Before approving any investment and uploading them to our portal, we check for four things:

A clear exit. 
Most of our investments have a 12 month term, which means we’ve got to know how our borrowers are exiting their loan within a specified time period. This could be by selling the property, consolidating other finances or moving their loan to a major bank.

Realistic repayments. 
We stress test our repayment plans to see if the person taking out the loan can make their repayments with us. It’s one thing to own an expensive property, but if a borrower doesn’t have the liquidity to make their repayments, we won’t lend to them.

Conservative loan to value ratio. 
A loan to value ratio is the difference between what a property is valued at and how much we are lending. This difference gives us a buffer in case the property needs to be sold unexpectedly.

Conservative valuation. 
Our preference is to have information from an independent valuer. But other times we may use a real estate appraisal, information from a sale and purchase agreement, rating value or a comparative market analysis (CMA). A CMA estimates the value of a property by looking at similar recently sold properties in the same area. If there are multiple methods available, we always use the lowest valuation and may also take GST off the value, if required.

Let’s have a look at valuations in more detail:

  • Real Estate Appraisal – Sought from a licensed real estate agent, usually from a well-known company, to provide a written description of the property and a likely selling price based on recent sales in the area. If a range is given, we would conservatively adopt the lower value.
  • Sales & Purchase Agreement – Our preference is an arms-length transaction through a licensed real estate agent or auction on a property that has gone to the market. This avoids related party transactions and private sales that could result in an inflated value.
  • Comparative Market Analysis (CMA) – We gather information from the same site that real estate agents use, such as the RPNZ site CoreLogic, which compares similar properties in the area to provide a possible median value.
  • Rating Value – also known as the Capital Value is the value the local council has given to the land and improvements and is possibly the most conservative method as they are updated only every three years.

Southern Cross Partners lends its own money to the property owner before making the loan available to investors. So, even as valuations trend upwards, we’re meticulous with who we are lending money to.

By being conservative, Southern Cross Partners can make the best lending decisions and provide strong investment options.