Neil Crosby

Valuation accuracy, variation and bias in the context of standards and expectations

Valuation accuracy usually conjures up images of empirical studies of comparisons between sales and valuations and different valuations of the same properties, and a number of references to these studies are included in the paper. However, this paper concentrates on the institutional influences which impact on valuations and their accuracy. The overall aim of this paper is to examine the legal interpretation of valuation inaccuracy in the UK. This might seem a bit parochial in the context of a World Valuation Congress. However, cases in many countries in the Commonwealth form precedents for each other and therefore decisions in, for example, the UK and Australasia, are drawn on by others in reaching decisions. The paper also reaches conclusions which have wider implications for all jurisdictions which have valuation disputes settled in courts, tribunals and any other quasi‐judicial body.

Price formation, mispricing and investment analysis in the property market: A response to “A note on ‘The initial yield revealed: explicit valuations and the future of property investment’”

Responds to “A note on ‘The initial yield revealed: explicit valuations and the future of property investment’” published in an earlier issue of the Journal of Property Valuation & Investment. Addresses issues raised and develops and extends the organizations of the original paper, in particular: definitions of certain concepts; the determination of value; the need for explicit valuations; price formation in the property market; and the influence of valuation on price. Reiterates the purposes of the original worked example of valuations; produces a corrected version; and in an appendix presents extended solutions and a fuller discussion of the central issues.

Means, motive and opportunity? Disentangling client influence on performance measurement appraisals

This paper investigates the extent to which clients were able to influence performance measurement appraisals during the downturn in commercial property markets that began in the UK during the second half of 2007. The sharp change in market sentiment produced speculation that different client categories were attempting to influence their appraisers in different ways. In particular, it was recognised that the requirement for open‐ended funds to meet redemptions gave them strong incentives to ensure that their asset values were marked down to market. Using data supplied by Investment Property Databank, we demonstrate that, indeed, unlisted open‐ended funds experienced sharper drops in capital values than other fund types in the last quarter of 2007, after the market turning point and at the time when redemptions were at their highest. These differences are statistically significant and cannot simply be explained by differences in portfolio composition. Client influence on appraisal forms one possible explanation of the results observed: the different pressures on fund managers resulting in different appraisal outcomes.

Appraiser behaviour and appraisal smoothing: some qualitative and quantitative evidence

There is a substantial literature which suggests that appraisals are smoothed and lag the true level of prices. This study combines a qualitative interview survey of the leading fund manager/owners in the UK and their appraisers with a empirical study of the number of appraisals which change each month within the IPD Monthly Index. The paper concentrates on how the appraisal process operates for commercial property performance measurement purposes. The survey interviews suggest that periodic appraisal services are consolidating in fewer firms and, within these major firms, appraisers adopt different approaches to changing appraisals on a period by period basis, with some wanting hard transaction evidence while others act on softer" signals. The survey also indicates a seasonal effect with greater effort and information being applied to annual and quarterly appraisals than monthly. The analysis of the appraisals within the Investment Property Databank Monthly Index confirms this effect with around 5% more appraisals being moved at each quarter day than the other months. January and August have significantly less appraisal changes than other months.

The influence of procedure on rent determination in the commercial property market of England and Wales

This paper examines the effect which the rent assessment process has on the level of rents and rental values in the commercial property market in England and Wales, by asking: is there an accepted definition of open market rental value which is consistently adhered to, irrespective of the context in which the rent is assessed? How, in theory, do the procedures by which an assessment of open market rental value is arrived at differ as between a new letting, a lease renewal, and a rent review? Is there any evidence to suggest that any theoretical differences in the operation of the various rent assessment procedures are borne out in practice? In particular, is there any evidence that in new lettings and lease renewals lease terms are changed after the rent has been finalised? Is there any evidence to demonstrate that there are different levels of rent which are sufficiently consistent to be referable to the context in which the rent was assessed? If so, does this produce difficulties in the valuation process which may not be presently fully appreciated? In addition to a review of the relevant literature, the primary research undertaken for the study was a survey of surveyors and solicitors involved in commercial lettings and rent reviews and the compilation of a database of rental valuations and transactions.

A Message from the Oracle: the Land Use Impact of a Major In‐town Shopping Centre on Local Retailing

Planning policy aimed at preserving the viability of UK town centres halted the wave of out‐of‐town shopping centres – Schillers ‘third wave’ of decentralization. Subsequently, a number of major in‐town shopping centres were developed in the UK. The first of these was the Oracle Centre in Reading. This study examines the impact of the Oracle on retail activity in the town centre using land use data. The Oracle acted as a catalyst for change, accelerating trends already observed in the centre, shifting the prime pitch, weakening peripheral areas and increasing turnover rates and vacancy. However, many of the initial short‐term property market impacts on rent and vacancy appear to have dissipated over the longer‐term, leaving longer lasting land use changes in periphery areas. The added attraction of the town centre appears to have offset many of the trade diversion impacts. However, some adverse effects may have been masked by strong consumer spending and a vibrant local economy during the study period.

Bank lending valuations on commercial property – Does European mortgage lending value add anything to the process?

This paper reviews a number of alternative bases of valuation which can be applied for lending purposes. In early 1999, the European Mortgage Federation suggested that the philosophy of a European Mortgage Lending Value (EMLV) should be based on “sustainable” values and this recommendation is compared to the current basis used for bank lending valuations, mainly market value. This comparison is of both concepts and applications. In addition, concepts and applications of worth valuations are considered. The paper concentrates on commercial property but many of the principles also apply to residential property valuations. The paper concludes that the EMLV concept of sustainable values is itself unsustainable. There are a number of reasons for this view, not least that the concept itself cannot be closely defined and will be interpreted differently by those who apply it. It lacks the objectivity of market value and the rationality of concepts of worth. The paper also questions whether any concept of value can apply over a period of time and suggests that all other “values” do not have a shelf life and relate to one specific point in time only. In application, in the absence of any meaningful conceptual basis, sustainable value appears to have been applied as a conservative market value. It may give the illusion of having some extended time horizon attached to it but this is the major danger. The reality is that it is just another product of the endless search for a single valuation figure which can give lenders the holy grail of longer‐term protection from lender default. This it will fail to do as all other bases applied so far to lending valuations have done. The recommendations of this paper are that all European institutions and valuer/appraisers resist this latest incursion into the fruitless search for the perfect loan valuation basis and concentrate on the other aspects of the valuation which can truly help lenders make their decisions. These are the economic, property market and occupier issues which should be considered by the appraiser and included as major items in valuation reports, many of which would be explicitly included in a full discounted cash flow approach to commercial property loan valuations.

Benchmarking and valuation issues in measuring depreciation for European office markets

Purpose – The paper addresses the practical problems which emerge when attempting to apply longitudinal approaches to the assessment of property depreciation using valuation‐based data. These problems relate to inconsistent valuation regimes and the difficulties in finding appropriate benchmarks.Design/methodology/approach – The paper adopts a case study of seven major office locations around Europe and attempts to determine ten‐year rental value depreciation rates based on a longitudinal approach using IPD, CBRE and BNP Paribas datasets.Findings – The depreciation rates range from a 5 per cent PA depreciation rate in Frankfurt to a 2 per cent appreciation rate in Stockholm. The results are discussed in the context of the difficulties in applying this method with inconsistent data.Research limitations/implications – The paper has methodological implications for measuring property investment depreciation and provides an example of the problems in adopting theoretically sound approaches with inconsistent in...

Commercial property loan valuations in the UK: implications of current trends in valuation practice and legal liability

This paper examines the legal liability implications of changes to the commercial property loan valuation process caused by the recession in the UK property market. It identifies the market background to commercial property lending and discusses the implications of the falls in value for lenders and valuers. These include the outcome of discussions between the various professional institutions representing these two groups and the increasing litigation between lenders and valuers in which professional negligence is alleged. The paper reviews the legal framework and critically examines the valuation process relating to instructions, bases and reporting in order to define a set of research questions. These are addressed via an interview survey of lenders and valuers. The findings of the study are: First, a minority of valuers continue to accept instructions from borrowers and this could lead to a conflict of interest, as lenders may rely on their report. Second, situations occur where lack of formal instructions prior to the delivery of the report casts doubt on the valuers ability to identify the needs of clients correctly. Third, it was found that valuers are providing valuations on bases which they do not think are appropriate. Valuers may incur liability if they do not inform clients of their reservations and this situation must be urgently addressed. Fourth, valuation reports are considered often to be deficient in contextual information concerning markets, which confirms the findings of earlier research in this area.

Client perception of property investment valuation reports in the UK

Property appraisers and the appraisal/valuation process have recently been the focus of attention in many parts of the world. This paper concentrates on one part of the valuation process: the final valuation report submitted to the client. The paper presents the results of a questionnaire survey conducted in December 1994 of clients who commission valuation reports from external valuers in the United Kingdom (UK). Generally, UK clients are satisfied with valuation reports received from external valuers. Where the users of valuation reports are themselves valuers, the level of satisfaction is more pronounced. However, there is a common criticism that valuers provide more information on the factual elements within a report - for example, the physical location and the layout and measurements of the building - than they do on the valuation methodology and the state of the market. While over half the respondents wanted to see more regulation of valuers through professional institutional guidelines, very few requested more government regulation. The findings imply that there is room for improvement in the provision of information within valuation reports. Valuers need to provide additional information in valuation reports concerning conditions and trends in property and wider markets, and provide comparable transactions data on which the valuation is based. Research should be focused on how such information can be provided in a market that restricts data and where valuers are increasingly litigated against for alleged professional negligence.