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17 JUL 2020

Valuation is more challenging, and more crucial, than ever

Amie Silverwood

Amie Silverwood

Content Manager - Communications and Media

Toronto, Canada

RICS

As the global economy attempts to move past the current COVID-related slowdown, uncertainty about the future means that it’s perhaps never been more difficult to gauge the value of assets, from properties to securities to businesses and everything in between. With little precedent for the kinds of challenges facing every sector right now, valuation professionals are more crucial than ever, particularly as stock markets are not always reflective of underlying value.

“Before we can give any advice, though,” says Leigh Miller, member of the RICS global standards and regulation board, “we have to assess where we are right now and what value tangible and intangible assets have in a drastically changing landscape.”

Miller is an experienced financial advisor and analyst with more than 35 years of experience across market cycles. He has spent his entire career with EY, where he specializes in the financial valuation of intangible assets, businesses and securities. Over the past four years, his responsibilities have grown to leading the firm’s global valuation practice and managing EY’s Valuation, Modelling and Economics Group.

“The first place to start when understanding the value of any type of asset is in having an understanding of appropriate methodologies,” he says. “The market is relying on the valuation profession to provide guidance and analysis in an atmosphere of uncertainty.”

While the circumstances of the recent downturn were novel, there are still trusted models and methods for assessing potential recoveries. For example, as the current stock market has taken a v-shaped recovery pattern, it has become clear that economies will not recover as quickly and will perhaps look more like an “L”, “W” or “Swoosh.”

“We have experienced a fairly quick recovery in equity markets, but an ongoing issue is that while the equity markets are generally considered to be a forward-looking indicator, there seems to be a disconnect between the way the stock market is behaving and how our societal behaviors are changing and how the overall economy itself is reacting.”

We are currently eight percent below the highs we saw in February, and fewer than three months ago we were 30 percent lower than where we are now. It is also clear that the equity markets will continue to be very volatile as news about COVID and various aspects of global economic activity are reported.

Leigh Miller, member of the RICS global standards and regulation board

Extended economic recoveries or additional lockdowns required to manage the spread of the virus may cause more businesses to fail, regardless of what governments do to create safety nets and reopen cities.
However, Miller believes that as more economic information becomes available and businesses adjust to longer-term social distancing measures, consumers and the workforce will take calculated risks, such as going to the office or going out to eat. Still, many businesses will face a tough road – especially those that require close human contact or require large gatherings of crowds.

“From a valuation perspective, changing patterns of human behavior or businesses that are highly leveraged may not have long enough runways to adjust and survive the downturn,” says Miller. “But from a macro perspective, some failures can be healthy for the economy as more resilient business models emerge in the new landscape.”

What this means in the wake of COVID-19 is that businesses are beginning to focus more on managing costs and taking note of what strategies and investments are outdated or unnecessary. For some, this may be office space. Open-plan and activity-based workplaces had reduced the square-footage needs of many companies, and now the global stress test on working from home may mean further reduced budgets for rents, travel, in-person events and other workplace expenses. Valuation professionals also need to look at the possible migration of offices out of primary and secondary cities and back to office parks in suburbs or tertiary markets – or have developed strategies for hybrid models accommodating both office work and work-from-home.

“Additionally, we are taking stock of businesses that are not only surviving the downturn but actually thriving,” added Miller. “We can learn a lot from which sectors and business models are reacting positively.”
To use the example of workforce management and offices, businesses that were able to adjust to remote working and strategized well-executed plans are better able to develop more forward-looking workforce responses for new risks and contingencies. This makes a company stronger and, from an investment perspective, more valuable.

What is certain for valuation professionals and the industries that rely on them is that the market uncertainty is bringing the need for qualified, accredited professionals into stark relief. It is also clear that now, more than ever, valuation professionals need to produce robust analyses that rely on standards that promote consistency and quality work product.

To this end, Miller is focused on the quality monitoring program for the Certified in Entity and Intangible Valuations (CEIV) credential that was developed by RICS along with several professional organizations. Starting this year, the program ensures credential holders are complying with the CEIV’s Mandatory Performance Framework and the Application of the Mandatory Performance Framework (collectively the MPF). This is on top of educational, professional and ethical requirements. All credential holders must comply with the quality monitoring program by completing an annual compliance assessment and maintaining credential requirements.

The CEIV credential was designed to enhance quality, consistency and transparency in the fair value measurement process and is issued to valuation professionals who perform fair value measurements for businesses, business interests, intangible assets, certain liabilities and inventory for financial reporting purposes.

“It’s essential that as valuation professionals we provide robust analysis and high-quality work product to instil confidence in our clients, users of financial information and regulators,” he says. “Now, more than ever, the market, requires accurate and fair assessments in order to empower both corporate and government decision-makers to have the appropriate information to move us all forward.”

Amie Silverwood

Amie Silverwood

Content Manager - Communications and Media

Toronto, Canada

RICS

Amie Silverwood is the Content Manager – Communications and Media for RICS in the Americas.

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