Understanding what an asset is worth, and what drives that value, is essential when management and stakeholders need to make informed, and effective, business and investment decisions. This requires decision-makers to trust the valuer’s opinion.
In this report, KPMG presents the key findings of its Valuation Practices Survey. The survey, conducted in October 2019, provides a short-form summary update of opinions on the current market environment and key valuation assumptions.
We captured the views of 59 professionals from a variety of organisations across Australia, including Australia’s Big 4 accounting firms, leading corporates, investment banks, investment funds, prominent boutique firms, second-tier accounting firms and smaller practitioners.
2019 was a continuation of the challenges that emerged in the global economy during 2018 – Brexit is unresolved, the US/China trade dispute is ongoing and a brief increase in risk free rates proved to be temporary as yields have once again dropped. We asked respondents for their opinion as to current level of value for certain key asset classes in Australia.
We believe the results provide insight into current perceptions of value. We hope the survey will help build consistency in valuation practices and enhance trust in the accuracy and independence of the valuation community.
Key findings
- There has been a decline in positive sentiment year on year. Valuation professionals expect the S&P/ASX200 to decline rather than increase in FY20. Only 22 percent say the index will increase in FY20, down from predictions of 39 percent for FY19 in the previous year’s survey.
- Australian government bond yields are an important indicator and the market is predicting a decline in bond yields. 49 percent of the respondents (a significant increase from 7 percent in 2018) believe the yield on 10-year Australian government bonds will decrease in FY20.
- In line with this, two thirds (68 percent) have changed the risk free rate they adopted for Australia in the last 12 months – a significant jump relative to FY18 (32 percent). However, the majority have not changed their market risk premium (80 percent).
- Uncertainty has increased since FY18 on current levels of value for key asset classes. Listed equities are now perceived as the most ‘overvalued’ asset class (54 percent), having overtaken real estate in the previous year. Real estate continues to be perceived as being ‘overvalued’ by close to half, but is down significantly on the previous year (47 percent, down from 89 percent).
- Unchanged from observations in FY19, retail, construction and the finance/insurance/real estate sectors are the top three sectors identified at risk of facing impairment challenges in FY20. To note, the manufacturing and mining sectors are expected to face an increased risk relative to FY19.
- The standard rate of inflation applied in valuations at FY19 for the coming years is expected to grow incrementally, specifically from 2020 to 2024, but remains below 2.5 percent on average.
- Australia has the highest market cost of equity of the selected developed economies at 8.8 percent.
We hope this report will help build consistency in valuation practices and enhance trust in the accuracy and independence of the valuation community.
