Norman Hutchison

The reporting of risk in real estate appraisal property risk scoring

Purpose – Aims to examine financial risk management. The UK valuation profession has been criticised for inconsistencies and failures to reflect risk and uncertainty in certain valuation assignments such as the pricing of urban regeneration land. Also the Investment Property Forum/Investment Property Databank specifically concluded that a new approach is needed which combines conventional analysis of returns uncertainty with a more comprehensive survey of business risks. This debate has been brought into sharper focus by the publication of the Carsberg Report, which emphasised the need for more acceptable methods of expressing uncertainty, particularly when pricing in thin markets.Design/methodology/approach – The paper commences with an examination of risk analysis within investment decision making and the property industry, drawing on the findings of the most recent literature that assesses the utilisation of risk management approaches.Findings – Financial risk management is examined and the workings of...

An analysis of valuation variation in the UK commercial property market: Hager and Lord revisited

Addresses the issue of valuation variation. The fundamental research question is to establish the range of valuations which a group of qualified valuers operating in the same market and using the same basic assumptions would produce in their estimation of price. It significantly extends the approach adopted by Hager and Lord and draws conclusions about different market sectors, locations and size of firms. The results of the survey show a wide variation in value across both rack rented and reversionary interests. In terms of the former over 80 per cent of all valuations produced a variation from the mean of less than 20 per cent with a corresponding figure of over 90 per cent for the reversionary investments. These levels of accuracy fall short of the contention that valuers can value to within 5‐10 per cent of market value.

Urban regeneration and property investment performance

Investors need to have confidence in the maturity of the market in terms of transparency of returns and risks. Information on property returns is normally available for prime markets whereas urban regeneration locations to varying degrees are characterized by an opaque rather than a transparent market, inadequate information on returns and risks, barriers to the availability of finance and uncertainty regarding the liquidity of assets. This paper presents findings of an empirical investigation into the development of a total returns index designed to measure investment performance of property in regeneration areas. Results show that over the long-term returns for regeneration property exceed national and local benchmarks. This finding has important policy considerations for regeneration and messages for the property investment sector.

Housing as an Investment

Considers whether housing has been a successful investment for the home owner during the period 1984‐1992, in absolute terms and in comparison with other investment media such as equities and gilts. Discusses the social and political influences which have encouraged a rise in home ownership and evaluates the trends in share ownership. Details the methodologies used in calculating the total returns from housing and the impact of taxation. Shows that, on an aggregated UK basis, housing has shown positive overall returns over this holding period and has proved to be a good hedge against inflation, although under‐performing the returns from UK equities. On a regional basis, the housing returns from the northern regions were higher than those from the south of the country, with the latter also showing a higher volatility of return. Raises the question of whether housing could be a worthwhile addition to an institutional property investment portfolio.

Managing Urban Land: The Case for Urban Partnership Zones

Multiple ownership of land can act as a significant barrier to brownfield redevelopment. Despite renewed interest in compulsory purchase, it is unlikely to become the normal remedy for multiple ownership, owing to its cost and complexity. Drawing on international experience and recent research, this article proposes the concept of an Urban Partnership Zone, in which existing landowners would be entitled to participate alongside the local authority and a chosen development partner in a joint-venture redevelopment company. Combined with greater planning certainty and other benefits, this innovation would enable the development process to operate more rapidly without immediate compulsory purchase.

Communicating Investment Risk to Clients: Property Risk Scoring

Investors require to be fully briefed on the risk profile of their investments. The UK valuation profession has been criticized for inconsistencies and failures to reflect risk and this was reinforced by the Investment Property Forum/Investment Property Databank (2000) which highlighted the need for more rigorous risk assessment measures within the property profession. The requirement of Basle 2, that banks must be more explicit about the risks of lending, has given added impetus to the desire for improved techniques for assessing and communicating risk. This study presents an alternative methodology for the scoring and reporting of investment quality risk – Property Risk Scoring – which utilizes the Analytic Hierarchy Process (AHP), a multi‐criteria decision making tool developed by Saaty (1980, The Analytic Hierarchy Process, McGraw Hill, New York, NY). The researchers asked senior valuers in the UK profession to identify, and score, the investment quality risks of prime offices at the date of valuation. The focus is on the principal elements of investment quality risk comprising yield movement, lease length, rental movement and change in occupier demand. Analysis of the results enabled the development of a generic market model to be used to risk score individual property investments. The results are reported on a 1–5 scale, similar to the widely accepted D&B credit rating technique, thus aiding market acceptance.

The calculation of investment worth – Issues of market efficiency, variable estimation and risk analysis

The Mallinson Report, published in 1994, emphasised the need for valuers to develop expertise for the purpose of estimating the worth of property investments. Implicit in attempts to estimate worth is the assumption that the property market displays some level of inefficiency and that, in such a market, price and worth may diverge. It is believed that astute investors can exploit such inefficiencies in the market to add value to their portfolios. This paper reviews the main issues relating to the calculation of worth. Specifically it examines market efficiency, individual and market worth, and the use of risk analysis in the calculation. Finally, it recommends a shorter analysis period in view of the uncertainty in the estimation of the variables.

Trade-related valuations and the treatment of goodwill

Guidance Note 1 of the Red Book states that the valuation of an operational entity includes four components: the land and buildings; the trade fixtures and fittings; the trading potential, excluding personal goodwill; and the benefit of any transferable licenses and consents. Accounting changes in recent years have increasingly recognised the importance of intangible assets such as intellectual capital and goodwill. Similarly, recent tax changes demonstrate the governments acceptance of the importance of such items in achieving and maintaining business competitiveness. This paper has two key objectives: first, to analyse the application of the Red Book to trade‐related valuations, paying particular attention to the treatment of goodwill and second, to critically evaluate the accounting treatment of goodwill and in particular the application of Financial Reporting Standard 10. In order to understand the workings of the market, the corporate hotel sector was used as a case study. The key findings of the research are that valuers expressed considerable unease with the apportioning of market value between tangible assets and goodwill, there was no consensus on how (or if) goodwill could be measured reliably. Second, that the valuation methods adopted are, to a degree, naive. While explicit changes are made to the cash‐flow projections, there is insufficient appreciation of the changing risk profile that might lead to an adjustment to the earnings multiplier. The accounting difficulties and inconsistencies concerning goodwill arise largely because of inadequate valuation methods. Recent tax changes also point to the need for a robust and defendable valuation methodology. Application of one such theoretically sound approach to valuing goodwill (the bridge model) is illustrated in this paper. While the research focused on the corporate hotel sector, the findings have wider implications for other sectors of the market where operational entities are valued with regard to their trading potential.

Attracting Institutional Investment into Regeneration: Necessary Conditions for Effective Funding

At an international level, governments are increasingly seeking to ensure greater involvement of the private sector in the financing and delivery of regeneration and sustainable communities. In order to attract more private finance, the public sector, in its more strategic role, seeks to create confidence for the private sector to invest. However, the success of such an approach depends on meaningful engagement between the public and private sectors and, in particular, with the financial institutions. The aim of the paper is to understand the needs of investing institutions and to identify the likely constituents of a working model suitable for encouraging institutional investment and bank finance into regeneration schemes. A cross‐asset perspective (property, bonds/fixed income, equities, private equity, hedge funds) is adopted, enabling an understanding of both the asset allocation decision‐making process and the criteria used in the investment selection procedure. Interviews with fund managers explored the investment decision‐making process, provided insights into risk/return criteria and mapped these across to the characteristics that define different stages of the regeneration process. The factors and inputs necessary in designing a regeneration investment vehicle that spans the varying regeneration stages are parameterized and options are forwarded.

Investment performance within urban regeneration locations

Purpose – Property performance indices have invariably focused upon prime markets with a variety of approaches used to measure investment returns. However, there is relatively little knowledge regarding the investment performance of property in regeneration areas. Indeed, there is a perception that such locations carry increased risk and that the returns achieved may not be sufficient to offset the added risk. The main objective of this paper, therefore, is to construct regeneration property performance indicators consistent with the CBRE rent index and average yield monitor.Design/methodology/approach – Local market experts were asked to estimate rents and yields for hypothetical standardised offerings for a range of regeneration locations throughout the UK, covering the period 1995 to 2002.Findings – The results show that rental growth was similar in regeneration locations compared to the prime market. However, the analysis highlights a major yield shift for property in regeneration areas in the short t...