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Assets and values – the fall-out from COVID-19

29 May 2020: Valuing assets in the COVID and post-COVID environments is bound to engender more questions than answers; and what will be the impact of all that government intervention?

It is going to be hard-going for the accountancy profession when it comes to valuing assets in coming months. Government intervention will have complicated the situation further.

“Assets such as real estate, infrastructure, as well as investments in unlisted companies will be challenging to value,” says Andrew Weir, Global Head of Asset Management and Global Chair of Real Estate and Construction, KPMG International; and Regional Senior Partner and Vice Chairman, KPMG in China. He has over 25 years' experience servicing listed companies, public bodies, investment funds and multi-national corporations in Hong Kong, China, Asia and internationally, and is already seeing the fallout of the pandemic.

“Why will it be challenging? The rate of return will be very hard to determine, especially in the light of shocks to the system, disruption of capital and negative interest rates – which are not now outside the norm. And there are very few transactions to reference against, in terms of which discount rate to use,” he adds.

“The other aspect of valuations that is particularly challenging is on the income side of the equation. What are the forecasted cash flows? What is the forecasted demand? And how much of that is impacted by the virus?”

Then the question becomes: how can you predict future patterns of demand? If you are able to predict them, what is real value and what is the result of government support? Within those patterns of demand, what is temporary and virus-related, and what is sticky? The questions just keep rolling.

“The whole question of valuations is going to be very hard,” he says, pointing out that professional valuers are starting to talk about professional uncertainty in their valuation reports. “When these valuations arrive in the financial statements, it all becomes very difficult for auditors. It could give rise to qualified audit reports.”

This means full information is key. “Chapter and verse disclosure is needed,” says Weir, “so that the user – that is the reader of a set of accounts – can understand that a lot of assumptions have been made and there is considerable uncertainty. Almost over-disclosure is needed of relevant information. Give ranges. Give scenarios. Have enough caveats and be clear that the valuations are judgemental.”

For how long should we assume this uncertainty will last? “In Hong Kong we have had a second wave of the virus and also a second wave of its economic impact. Everyone assumed a hard two or three months. Very few scenarios envisaged we would get to June and still be in significant downturn,” he responds.

“Also, all the assumptions globally were about a V-shaped recovery. China is now on the road to recovery. All other economies are looking at a much longer, harsher period of recovery. And there will be ups and downs.”

In practice, this means a bespoke, case-by-case approach to valuations. By 31 December 2020, the situation for valuations will become clearer, he says, but, in the meantime, everything will be heavily caveated.

“However, it is remarkable how quickly people can deal with uncertainty,” Weir comments. “In Hong Kong, in the last year we have had social unrest, economic downturn, then the virus, then new economic downturn and there will be more social unrest. People are agile.”

As for the profession, Weir says there will be change. “First, the virus has acted as a huge catalyst for the digitisation of the economy, companies and the profession. Second, ICAEW is all about professionalism and quality. Modernising a more digital profession will make it more relevant,” he says.

“Third, traditionally, accountants record history; but, going forward, there will be much more demand for modelling, cash flow analysis, budgeting – all these tools will become much more vibrant. The result of the virus will be a profession that is much more on the front-foot and tech-driven.”

Turning to real estate, one of his specialisms, Weir comments that real estate owners are one of the few parts of our economies that have not been helped. How will they help themselves? “They will have to be modern in what they provide and refresh the value proposition,” he says. “They will have to embrace the technological and digital transformation, and align with all the changes in behaviour and taste we will see from users. The days of the passive landlord are gone.”

Finally, Weir comments that we are seeing a lot of short-termism. “There is a risk that the questions that companies are wrestling with are short-term ones in relation to government support,” he says. We must get back to being innovative and the strategic thinking upon which strong economies are built.