Cost does not Equal Value – A Valuer’s Tale from Eastern Europe

By David Howard, Joint Managing Director, Winterhill (Romania)

Introduction

Although commercial valuations are Valuers’ principal activity in our field of expertise, residential properties often provide the most interesting and challenging assignments. Two recent cases undertaken, at extreme ends of the residential sector in Romania, illustrate this, and highlight the challenges of valuing in a still relatively immature market of Eastern Europe.

Description of the First Property

In one end of the market, we were assigned the responsibility to value a major western European nation’s Ambassador’s residence and chancellery. The property was a magnificent historic 1920’s style villa on a leafy boulevard in the heart of one of the historic central neighborhoods of Bucharest.

The building, originally built for a Romanian oil magnate, oozes both art-deco and art-nouveau architectural features at every turn, marvelous mosaics, a double-height atrium with stained glass cupola, a bath hewn from a single block of Italian marble, even the original 1920’s gymnasium. Above all, it has the indefinable and unquantifiable qualities of heritage and providence, the stories if only the walls could speak, right down to a stained-glass window reputedly attacked decades ago by an angry mob protesting at alleged misdoings in a distant colony ruled by the Embassy’s home nation.

Key Challenges

Valuing a unique property with such a remarkable heritage stretches the Valuer’s traditional methodologies of market comparison, income, and cost approaches, where the whole is so much more than its constituent parts. On the one hand, the modern economic use is quite limited due to the historic design and layout and the very historical features that make it unique. Not to mention the expensive maintenance of the historic fabric. On the other, it is a supreme example of the magnificent private villas which deservedly led Bucharest to be known in the interwar period as the ‘Paris of the East’, for which there is a small, but well-funded buyer group.

A trophy purchase for a hypothetical discerning purchaser!

Description of the Second Property

At the other end of the market, is a valuation of a house within a Roma community on the edge of a major Romanian city. Roma houses in Romania, often termed ‘palaces’, are legendary for their usually gigantic size, plethora of turrets, columns, intricate metalwork and multiple balconies – an eclectic gaudy style which is as much a statement of wealth as a comfortable home to live in.

For the valuation, on the positive side, the client legally owned the land, and the building was fully completed (many are not on either count). But, against this the house was constructed without any planning or construction consents, and it had no connection to any utilities, so the value was deeply discounted.
 
Key Challenges

The core valuation challenge is the location, more specifically the neighbourhood, and the realisation that the market for a property in this neighbourhood is extremely limited. Non-Roma purchasers would not consider the neighbourhood, and within the Roma community demand is likely to be minimal for someone else’s dream project. Unfortunately for the clients, cost does not necessarily equal value.
 
Conclusion

Two interesting valuations, illustrating the challenging professional life of valuers in Eastern Europe. Also, reminding us that the interplay between cost and worth of properties make key differences in the client and property owners’ decisions.

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