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| The Price is Right? Issue 35 - Octt 07 Stephen Chung, Managing Director, Zeppelin Real Estate Analysis, on the value of predicting and second-guessing government auction results. In jurisdictions across Asia, many people pay serious attention to Government land auction results, especially when prime or huge sites are involved. Sometimes such results can, rightly or otherwise, influence the immediate real estate market prices or even the stock market. It is also customary nowadays for the media to interview real estate appraisers, agents, and market consultants beforehand for their opinion on what price a certain piece of land can fetch in a forthcoming auction. Often, such price estimates are listed and compared with the actual land prices fetched, and sometimes there is a substantial difference between the ‘expert forecast’ and the actual price. When this happens, most media seems to deem that the experts to be ‘wrong’ and the market, or the buyer to be specific, to be ‘right’. However, it could be argued, those who deem the land buyer, be this a publicly listed real estate developer or a wealthy private individual, to be almost always right and the market professionals to be almost always wrong when the actual price and the estimated prices differ, do not quite fully understand the mechanics of real estate value. The myth “if someone is willing to pay for it, then the price must be right” still persists in many audiences. In fact, in reality there is no way whatsoever for a real estate market professional to be able to accurately guess, estimate, or predict what the actual final land price will be unless he or she is also a practicing astrologer or some kind of feng shui master, assuming such mystics work.  Why not, one may ask? The reason is simple. a) Auction price prediction This means foreseeing who will be final buyer and what sum he or she is willing to pay. Getting the average market price right does not guarantee a match with the yet unknown price which a prospective buyer may pay. b) Auction price estimation This is what most market professionals actually do in such circumstances, projecting a mostly likely typical or average price for the piece of land in question. This means finding the normal bell curve for the price, based on past data, technical application, or professional judgment. The goal is never to guess what a particular buyer will pay or, for that matter, who is likely to be the particular buyer. If it just so happens that a buyer falls within this normal bell curve, then the market professional’s estimate would very likely be close to the actual auctioned land price i.e. assuming such professionals get it more or less in the ballpark in the first place. If not, for example if the purchaser is not this ‘typical’ buyer whose price will match the bell curve, then the actual auctioned price will be miles apart from the estimates. It is also common to see some market commentators saying things like “the market is optimistic and prices should rise” when the transacted price is higher than the estimated market values, or “the market is adopting a wait-and-see attitude and prices may remain stable”
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| when the transacted price is lower than the estimates. While these opinions could harbour some truth in them, they should be read and viewed with a critical mind. Reasons for this include: When the tender or auction price is higher than expected. A developer who pays a higher than market value (MV) price for a land site may have: 1) Made a mistake and overpaid (and they do at times!) 2) Needed to replenish its land bank so badly that they would pay any price for land. 3) Had an investment value well above even the seemingly overpriced price paid for the land owing to special visions and skills. When the tender or auction price is lower than expected. A developer who pays a lower than MV price may have: 1) Been lucky in that there is so little competition that he or she needs not offer his or her (secretive) best / highest price, which could actually be higher than the estimated MV, for the land (particularly under the auction scenario.) 2) Still made a mistake yet gets the land anyway due to few competitors. It is clearly erroneous to assume that just because the buyers are big name groups with immense corporate resources and professional / executive abilities, their offer prices must always be right. While tenders and auctions of sizable land sites offer glimpses of market sentiment and information, there is no need to over-emphasise their worth as market insights which in turn involves more than just monitoring a few big transactions. A bid price higher than market value does not automatically spell jeopardy for the bidder and likewise, a bid price lower than market value does not automatically spell gain. RFP
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Key title: RFP magazine
Abbreviated key title: RFP mag.
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