Property Valuation in an Economic Context

Citation

Grover, R. (2008), "Property Valuation in an Economic Context", Journal of Property Investment & Finance, Vol. 26 No. 4, pp. 370-371. https://doi.org/10.1108/14635780810886663

In Property Valuation in an Economic Context, Peter Wyatt focuses on the valuation of commercial and industrial property. He aims to do two things in this book. First, to place the different types of valuation into a framework of three interlinked market sectors, namely occupation, investment and development. Second, he seeks to set valuation in its economic context. The book is wide‐ranging in its review of valuation methods, including not just the five basic methods, but also looking at issues such as valuations for tax purposes and compulsory purchase and compensation, valuation for financial reporting, valuation accuracy, and risk and uncertainty in valuation. Although he draws on examples from different types of business property, this is not intended to be a book that looks at, say, the valuation of retail property compared with offices or leisure properties but rather it is concerned with valuation methods.

The book starts with a review of the economic context of valuations both from a micro‐ and macro‐economic perspective. The economics of the property market are examined. The book explains how markets function, the concept of derived demand, the influences on factor markets, and the economics of location. This is an important topic in view of the emphasis placed by international valuation standards on valuation concepts derived from the workings of markets, and is one that is not always very well covered by economics textbooks. Subsequent chapters discuss valuation principles and the main valuation methods before applying them to valuation for investment, development and occupation. This approach enables Peter Wyatt to examine a number of common factors before classifying valuations into their different groups. These include the basis of value, the time value of money, yields, and the measurement of properties as well as introducing the five main methods of valuation.

The core of the book is the three chapters on property occupation, investment, and development valuation. That on property occupation looks at rental and capital valuation of leases, but also valuations for financial reporting, for loan security, taxation, and compulsory purchase. The chapter on investment valuation introduces DCF and uncertainty in valuation models. That on development is concerned with the residual method.

Does the book place valuation in its economic context? The book would be improved if it had addressed three issues. The macroeconomic section contains much useful data about the property market but is quite limited on the key variables that influence the market. Second, the introductory chapter does not address the relationship between market prices and valuations. Valuers are interpreting evidence of market prices and the valuation process may distort evidence. Peter Wyatt does discuss valuation accuracy and variance but not until chapter 5 on property investment valuation. The book takes a conventional partial equilibrium model of the property market in which a key variable changes to generate a new equilibrium. However, some economists have argued that the property market does not function to produce a conventional equilibrium. For example, the optimal location may not be available so a second best location is selected leading to later changes if something better becomes available so that the property market never reaches an equilibrium, but is in a state of constant change. Or imperfect information may mean that market players respond to other traders' search patterns rather than to conventional market signals. If valuation is to be placed in an economic context one needs to explore the process by which market prices are formed in the property market, how these are interpreted by valuers, and the influences on valuers.

Peter Wyatt's classification of valuations into those for occupation, investment, and development provides the reader with a mind map to aid understanding. There are likely to be differences of opinion as to how well this structure works. Perhaps the issue of time preference for money could have led to the introduction of the DCF model earlier. I found some of the juxtapositions of techniques a little strange, for example, moving over a few pages from valuation for financial reporting to inheritance tax valuations, from corporate to personal ownership with no assisting linking passage. The reasons why the methods and ideas are linked together in a chapter are not always easy to follow.

The book is well‐written with clear examples. It is one that can be read profitably by students and anyone looking for an introduction to valuation. Inevitably in a book that is as wide‐ranging as this, there are topics which could be developed further, although there are plenty of specialist books in areas such as tax valuations, compulsory purchase, investment appraisal, and risk management that the reader can go on to having been introduced to the area by this book. The fundamental question is does the book work in its own terms? The answer that I think has to be given is a qualified yes. Peter Wyatt is to be congratulated for posing the right questions but the approach did not always work in detail for this reader.