Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited
Article Type: Editorial From: Journal of Property Investment & Finance, Volume 29, Issue 6
The journal started life in the early 1980s as the Journal of Valuation so it is fitting that every now and then it should put out a special issue on valuation.
The journal was, as it is now, based in the UK and it was the first time that academic valuation papers had a home. Publishing valuation papers before the Journal of Valuation outside of the US was restricted to professional magazines and so it became the first choice outlet for both experienced and young academics trying to make their mark. Since then much has changed. We now live in a world of numerous academic outlets, across the world and the journal has changed title and direction many times through to its current focus on investment and finance and commercial real estate. We also live in a world of performance measurement and a number of places such as the UK and Australasia have research assessment exercises run by government, and some of those exercises rank the outputs based on journal rankings. Some of those rankings are bizarre but they influence the placement of articles and are therefore powerful indicators of quality. They influence promotion boards and therefore it is important that journals that want to progress up the rankings have rigorous refereeing regimes in place. Speaking from first hand experience, having sat on the last two UK Research Assessment Exercises, there was a clear relationship between the perceived or actual ranking of the journals and the quality of the articles as judged by the RAE scrutiny panel. There were however some astonishing outliers.
The mix of papers in this issue also indicates the internationalisation of the journal. The first volume of the Journal of Valuation was virtually exclusively UK and dominated by the University of Reading, its first home. You can almost picture Andy Baum, the first editor, running up and down the corridor pleading with colleagues for papers to fill his new love child. The latest issue has no authors based in the UK and they come from as far away as Australasia, Asia and Europe. The papers are on a diverse range of issues which include leases, retail rents, airports and mixed use developments. It also includes one paper on one of the issues that seems to be exercising many minds in the real estate industry and that is sustainable buildings.
However, one issue that was strangely lacking from the accepted papers was whether valuation had a part to play in the financial crisis and its solution. I found this surprising given that Sir John Vickers, head of the Independent Commission on Banking in the UK suggested that:
The shock from the fall in property prices, even from their inflated levels of a few years ago, should not have caused havoc on anything like the scale experienced. Rather than suffering a “perfect storm”, we had severe weather that exposed a damagingly rickety structure (Vickers, 2011, p. 2).
However, in his interim report, although there are mentions of real estate they are all refer to how we got into the mess in the first place, they were not part of the solution. But more recently, the head of NAMA, Frank Daly, addressed the Chartered Surveyors in Ireland and suggested that valuation and valuers had avoided their responsibility by hiding behind the excuse that they had done as they were asked by providing market values, no more or no less:
The crisis in which Ireland now finds itself has, as its source, a banking implosion which was driven ultimately by a property market bubble. It would be remiss of me to appear in front of a gathering of construction and property professionals such as this without raising the question of whether, at least collectively, you could have been more vigilant in drawing attention to the enormous systemic risk which was being created. Many of you must have wondered about the sustainability of the ever-escalating upward price spiral that was developing by the middle of the last decide, a spiral driven by cheap money and by a coterie of bankers and market participants who appeared to lack a basic understanding of the dynamics of a properly-functioning market. You must have questioned whether a fourfold increase in commercial and residential property prices in the decade after 1997 could possibly have been justified given its ever-increasing divergence from the trend of economic growth over the same period.
I expect that the valuation professionals amongst you will claim that your job is to provide the best estimate of the market price of a particular property at a particular point in time. However, there is a widespread external view that your responsibilities are more extensive than that. This applies also to other professions such as accounting and auditing which have been similarly criticised for adopting a narrow interpretation of their responsibilities during the evolution of the banking and property bubbles. At a time when many lay people with no great knowledge of the property business were becoming increasingly alarmed at the disconnection between the prices being paid for properties and the intrinsic long-term economic value of those properties, could the two professional bodies not have signalled some concern at what was taking place? (Extract from address by Frank Daly, Chairman of NAMA to The Society of Chartered Surveyors 12th April 2011).
NAMA is the Irish National Asset Management Agency and was established in December 2009. Its purpose is to acquire assets in the form of property-related loans from the Irish bank. The overall objective of this process is to bring stability to the banking system by removing impaired loans from the balance sheets of individual banks.
The message is clear. The valuation profession should be identifying ways in which it can extend its advice beyond confirmation of current price and signalling to not just clients but to a wider community about the dangers of asset price bubbles. Real estate professionals have a wider duty than to the client. The academic community, through these and similar pages, has a duty to aid real estate professionals to undertake these tasks and should be identifying and testing approaches by which these objectives might be achieved. However, when it does, does anybody listen?
This presupposes that the industry and its academic support network actually knew we were heading for a fall. My view is that the vast majority of both did know; they did not know when and they did not know what would prick the bubble, but they did know that it would be pricked. Any cash flow undertaken in 2005 and 2006 with any sort of objective inputs would get to a negative NPV, certainly in the UK or Ireland which, if you believe the global indices accurately reflect differences between countries, had the highest peak and the largest falls in asset values. If they got a positive they were cheating.
This also presupposes that anybody wants to stop a financial crisis ever happening again and that is highly debatable. The behavioural finance literature is depressing in that it shows that there are too many opportunities to make money and too few risks of losing it in a bubble and crash. So it is a shame that the UK ICB does not realize that real estate could be a much bigger part of the regulatory solution as well as being the problem because, without a sound regulatory solution, it will all happen again.
So the journals, including this one as it has its 29th birthday this summer, need to keep publishing work that not only advances our theoretical understanding, but also addresses the major practical problems of the day and ultimately aims to impact on the behaviour of real estate markets in the future.
Neil CrosbyUniversity of Reading, Reading, UK