Editorial

Citation

Crosby, N. (2009), "Editorial", Journal of Property Investment & Finance, Vol. 27 No. 6. https://doi.org/10.1108/jpif.2009.11227faa.001

Editorial

Article Type: Editorial From: Journal of Property Investment & Finance, Volume 27, Issue 6

At its commencement in 1982 this journal was called the Journal of Valuation and valuation remained in the title well into the 1990s. The journal originated in the UK where valuation was an important component of one of the most mature property markets in the world and valuation was seen as the core subject on many real estate management degree programmes. As the discipline matured academically, valuation has been removed from its built environment roots and has taken its place in many academic departments as an application of the disciplines of economics and finance; and the iournal has also widened its focus into investment and finance.

However, because of the nature of property asset markets and the need for scorekeeping not prevalent in other, more frequently traded, homogenous assets, valuation as an activity refuses to go away and every now and then hits the headlines. “Every now and then” appears to be every time there is a property market “crash”.

In the aftermath of all three major property market crashes in the UK; the early 1970s, the early 1990s and now the late 2000s, valuation has become a hot topic in industry. In the 1970s, the aftermath saw the intensification of the move towards standards and also a long debate over investment valuation methods. In the 1990s, the debates over technique were raised again, fuelled in the UK by the institutional lease structure that saw tenants on 25-year leases with upwards only reviews paying rents that were two or three times rental value with no hope of review. The journal had a fair share of this debate within its covers. The wider issue of the valuation process was also raised again. Some blame was attached to “valuations being too high” rather than “values being too high”. Banks increased the number of negligence claims against valuers and suggested new bases; presumably to protect them from the valuation regime that had forced them to lend too much money. This is a bit like Chelsea blaming the scoreboard operator for losing to Manchester United in the Champions League Cup Final last year (for US readers not into the European kind of football, please substitute Arizona Cardinals, Pittsburg Steelers and Superbowl in that order, but please keep the analogy of the scoreboard operator!).

Market value is a score, nothing more. For both banks and investors, it provides a mark of the current score in the property market game. It has no shelf life and should not have one. An accurate valuation is one that provides the most accurate score of current trading prices. Unfortunately, not all jurisdictions agree and therefore global comparisons of markets using valuation-based data are fraught with difficulty; for example, major questions remain about the German approach compared to some others. Would the various international scoreboard operators (in this case substitute valuers) get the same score in the same match? In the latest IPD Global index, Irish property capital values have fallen around 40 per cent from year end 2007 to year end 2008, the UK around 25 per cent and the US over 10 per cent. All of the other European markets show a capital value fall of less than 10 per cent with Finland, Germany, and The Netherlands less than 5 per cent. New Zealand was still rising (although 2009 has seen a reversal here as well).

Diversification policies based on the above may be sound if the property markets do behave as indicated by the valuation based indices. But we don’t believe that valuations are perfectly accurate within the confines of random valuation variation. There is a substantial literature (again some of which is in this journal) on valuations lagging price change, smoothing the peaks and troughs prices, anchoring on comparable transactions, etc. But are some valuers now less sticky than others? The UK valuers are feeling a little aggrieved. Having moved valuations faster than any other regime in history (to my knowledge) by an average 1.8 per cent per month (around 25 per cent) between June 2007 and September 2008, they were accused at the November IPD conference of being off the pace, some managers suggesting by 15 per cent to 20 per cent. By March 2009, they had “scored” a further fall which reached over 40 per cent from the June 2007 peak and increased the average rate of decline to 2.5 per cent per month between June 2007 and March 2009. This fall is around three times quicker than the movement of val;uations in the 1990 recession. However, this new level only fits in with where the mangers were suggesting the market was in October/November – if the clients were right, the valuers are six months off the pace despite this fastest fall in valuations since records began.

But, rather than blame the valuers for some of the woes of the market (German valuers for contributing to the run on their open ended funds in 2005/2006 and the UK valuers for the run on similar funds in 2007/2008 – and for putting loans into breach by just doing valuations! – see EG Capital December 2008 for a report on the last two issues), isn’t it time we used this crash to create a longer term research agenda for valuations.

In previous recessions the issues have been driven by an element of knee jerk reaction but most issues, driven to the surface in a recession, are equally present in any market state. Questions of how valuers can be helped to mark to market accurately and what information to use apart from direct property market information are just as pertinent in fast rising markets. Does the global index raise issues of different interpretations of valuations in different markets? Does the different level of transparency and information cause differences in valuations that make international markets look less or more similar than they are. There is a whole performance measurement valuation agenda that, given the importance of the valuation-based indices to global markets, needs addressing. Overlaying all of that is a question mark against clients and their influence – much researched already but mostly by experiment and survey and not by quantitative analysis of the results of valuations. As IPD databases expand across the world the possibilities increase.

Bank lending is the other major issue to come out of the recession, as it always does. Leaving aside the cynical view that the last thing bankers want is sensible lending policies while they are being rewarded solely for doing deals, an increased regulatory framework looms and valuations should be part of that control mechanism. The questions of whether bankers are helped by using market value at the beginning of a loan as an indicator in their decision making is crucial, especially in rising markets when they give out loans and stretch their own criteria to breaking point (which many would argue fuels the rising asset market relative to the occupational market in the first place). Do we need to debate whether other valuation bases give a better quantitative basis – would the use of the investment value definition create a securer lending basis or will mortgage lending value be promoted by the EU and others despite its lack of any academic or theoretical basis? Other mechanical approaches have been suggested – they should be investigated and tested with the appraisal academics taking the lead.

Four University of Reading academics have recently been asked by the UK Investment Property Forum to raise the valuation issues that are created by the recession. While suggesting that virtually all are nothing to do with the recession and are issues in all market states, they have responded with the following. At the time of writing publication is imminent and should precede this journal publication date. The eight issues identified for the UK are set as a series of questions and they are as follows:

1. 1.

   Is a valuation process which focuses on the individual property sufficient for a contemporary investment market where vehicle structure has significant impacts on value and performance?

2. 2.

   Should comparative market valuation methods be routinely supplemented by cash flow based investment value approaches?

3. 3.

   Are transactions which take place in a thinly traded market representative of market value?

4. 4.

   Should price sensitive information from outside the direct property market be incorporated into property valuations?

5. 5.

   Do valuations for secured lending provide appropriate information for the management of lending risks?

6. 6.

   Should the basis or reporting of valuations for the specific purpose of pricing unit trusts be amended?

7. 7.

   How can the RICS and other institutional bodies ensure that institutional constraints do not hinder developments in methods and use of information?

8. 8.

   Can effective regulation be devised that ensures the independence of valuations?

Some are UK centric, many are not, and I am sure you can all think of a lot more for your own national and international markets.

Neil Crosby