GUEST OPINION: Idiosyncratic spreadsheet models shouldn’t be relied on to make multi-million-dollar investment decisions in today’s times
Who crunches the numbers that are used to inform your organisation’s acquisition and divestment strategies and what tools do they use to help them arrive at their final figures?
In many Australian property businesses, analysts using outdated software programs and models continue to hold sway.
Typically, those programs are the creation of some bright young thing, fresh out of university, who’s developed a highly complex bit of kit that’s tricky to operate but which has nevertheless become the go-to tool for the organisation.
Very often that person moves on after a year or two but their behemoth of a model remains in use, validating investment decisions for leaders who have given limited thought to how the numbers before them have actually been derived.
Behind the high tech eight ball
Why is this? Australia’s fast growing proptech sector has developed an impressive array of specialist tools and programs that can perform the same functions smarter, faster and more economically.
In our view, entrenched but misplaced conservatism is the chief reason. While businesses across a host of other industries have embraced digitisation, deployed an array of applications connected via industry standard eco-systems, many commercial property players have yet to do so.
‘Doing things as they’ve always been done’ is still an acceptable modus operandi in many organisations and that’s not surprising, given the healthy gains most have enjoyed over the past two or three decades. When you’re clocking double figure returns, year after year, ‘it ain’t broke, don’t try to fix it’ is a highly defendable position to take.
Hence, there’s been no reckoning, no urgent impetus to implement technology-driven productivity improvements, as Australia’s mining industry, for example, was forced to do when commodity prices began collapsing a decade ago.
That, along with the fact that developing your own software inhouse is seen as a convenient and relatively cheap option, has stopped the property sector thinking too deeply about the provenance and integrity of the tools it relies on – and whether commercially developed alternatives might deliver superior intelligence and insights.
The stakes are high
But that attitude could be set to change – and fast – as rising interest rates drive the country’s commercial property market into a downturn that will undoubtedly see asset values heading south in 2023.
Many owners and investors will be forced to make some weighty decisions on that front in the upcoming months, as margins erode, liquidity is stripped out of portfolios and restoring balance sheets to good health becomes a pressing priority.
‘How well is Property X performing’ and ‘what is it worth on the open market’ will be the 64 million dollar question leaders need answering.
Meanwhile, counter-cyclical players will be – are! – readying themselves for action and sharpening their knives, and leveraging modern tools to determine how much of a bargain some of the assets that make their way onto the market truly represent.
When there are seven and eight figure sums riding on the answers, the wisdom of relying on homegrown valuation models, or worse a model borrowed from an ex-employer, may not have been critiqued, refined or tested for accuracy and integrity to provide those answers may – should! – be called into question.
The power of professionally developed tools
Choose a specialist, off-the shelf platform or solution and it can be a very different story. What you’ll get isn’t just user friendly, rigorously optimised software, written by developers using modern testing frameworks who do it for a living.
In the case of investment management solutions, acquiring the ability to weigh-up risk/return across a range of scenarios; assess valuation impacts of multiple future outcomes, factor in details such as lease terms, covenants and like, and presenting recommendations to capital partners from a shared modelling platform could be the difference-maker to close a deal.
A valuation platform can deliver so efficiently and well that it may be possible to rationalise your analyst headcount, while capitalising on the benefits of reliable, defendable data.