Advanced Issues in Property Valuation. Hans Lind

Чтение книги онлайн.

СКАЧАТЬ property valuation and how can discounted cash flow methods lead to a market value?

Uncertainty and bias in property valuations often come to the fore in discussion about property valuations after a downturn in the market. The old, high valuations are questioned by investors that have lost money, and there is a demand for more discussions about uncertainties in valuations. In Chapter 4, different interpretations of uncertainty and bias are discussed, e.g. that valuers disagree or that observed prices differ from estimated market value. Possible bias caused by client pressure and the stability of the value are also covered together with possible recommendations to improve the quality of valuation from the perspective of giving the reader an idea about how uncertain the estimated market value is.

      Chapter 5 analyses valuation for lending purposes and long‐term value concepts. A crucial issue in this context is the predictability of market prices and if price bubbles can be identified in advance. Can the risk for falling prices be handled by adjusting the Loan‐to‐Value ratio or do we need other value concepts than (current) market value? Mortgage lending value and worth are examples of such concepts. The most general question covered is, if rules about valuation can reduce the risk for future real estate‐related crises?

      Valuation for accounting purposes and other accounting‐related issues are covered in Chapter 6. The fair value concept and its relation to market value is discussed together with the concepts entry price and exit price and especially how fair value should be interpreted in thin markets. The fair value hierarchy concerning valuation methods is discussed both in this chapter and in Chapter 3. There is also a section about quality in financial reporting.

      Sustainability and property valuation is discussed in Chapter 7. What is really meant by a sustainable building and what should we expect to be the difference in value between ‘brown’ and ‘green’ buildings? Are special methods needed for valuing sustainable buildings? What should we expect to happen with the value difference over time?

      Chapter 8 is about transparency and property markets. Transparency is an important topic both for the real estate market as such and for the valuation process as reported in valuation reports. It is, however, underlined that there are limits to transparency in both these areas. Having more information than others is something that can lead to higher profits, both for real estate investors and for valuation companies. As property valuers also use experience and a ‘feeling about’ where the market is going, it is hard to make the valuation process completely transparent.

      Ethics, the role of the valuer and governance are covered in Chapter 9. Not least because of climate change and other sustainability issues, it is more and more expected that all companies and professional groups take a broader perspective on their activities. Companies formulate sustainability policies and policies about corporate social responsibility (CSR). On the other hand, it is questionable to what extent valuers can ‘lead’ the market. Important issues are also the credibility of valuers and problems caused by asymmetric information including problems for buyers to evaluate the quality of a valuation product. Authorization or certification systems are discussed as one way to reduce these problems.

In Chapter 10, three issues are covered. The first is technological development, e.g. in the form of artificial intelligence systems. The second is possible structural changes caused by unexpected events, illustrated by the corona‐pandemic. The third issue discussed is ideas about ‘radical uncertainty’ and what that might imply for property valuations.

1.3 How the Book Can be Used

      Most chapters start with an overview of what is said in basic textbooks, and then discussions from scientific articles are added. In each chapter, central articles are referred to. New articles are continuously published, and it is important that teachers try to update course materials in relation to recent ideas and arguments. Such an update can also be made as student exercises, where students are given the task to find more recent articles and then relate what they find in these texts to what is said in the book.

      Knowing local conditions (in a country or region) is always important for students as this is the market where most of them will work in the future. In each chapter, there are a number of specific exercises that can be used in courses. Many of these are of the type ‘Interview local actors about how they look at XX’ or ‘Interview local actors about current problems and controversies about XX’.

      Many of the issues discussed are multidimensional and it is not easy to evaluate all aspects and take a stand on the issues. One format that we have found useful and popular among students is ‘Pro and con debates’. In many chapters, there are suggestions about topics for such debates. Students are then divided into teams and should make a presentation arguing either for or against a specific proposition. In a second round, they should present counterarguments to the arguments presented by the opposing team, etc.

      Note

      1 1 The list could be made longer and include e.g. Havard (2002), Baum and Crosby (2008), Scarrett and Osborn (2014) and Morri and Benedetto (2019).

2 The Concept of Market Value

      2.1 Introduction

      There are two fundamental value concepts: Market value and Investment value or Worth (IVSC 2019 , p. 17). Investment value is a rather uncomplicated concept as it simply refers to the value from a specific owner's/investor's perspective. This is calculated by a standard investment analysis in the form of a cash‐flow analysis. The inputs are then expected net operating income from that actor's perspective and the rate of return this actor demands and the expected residual value at the end of this actor's expected holding period. Such a residual value is normally calculated from the expected net operating income at the end of the calculation/holding period.

      Market value is important in a number of different contexts, e.g. when transactions are made, when property is used as collateral for lending and in financial reports. The fact that this value concept is so important, and as will be clear below, rather complicated, it is important to look closer at the definition of this concept. A number of aspects will be covered in this chapter, but value concepts will also be discussed in Chapter 5, and in Chapter 6. In Chapter 6 the concept of Fair value and its relation to market value will be discussed. It could also be useful to be aware of the distinctions between entry price and exit price explained in that chapter, where entry price at the date of a transaction is what has been paid and exit price what could be fetched if the property is sold at that date.

      There are also other economic (value) concepts than market value and investment value that may be relevant in different situations. Examples of such value concepts are acquisition cost/‐value, replacement cost/‐value or long‐term values of different kinds. We will further discuss such value concepts in Chapters 5 and 6.

СКАЧАТЬ