Advanced Issues in Property Valuation

Hans Lind, Bo Nordlund

• Publisher: Wiley
• Year: 2021
• ISBN:
  9781119796244
• Edition: 1
• Topic: Commerce
• Subtopic: Immobilier

Discover an insightful new text covering advanced problems in real property valuation

In Advanced Issues in Property Valuation, real estate valuation experts and authors Hans Lind and Bo Nordlund provide a deep understanding of the concepts, theories, methods and controversies in property valuation. The book introduces readers to controversies and discussions in real estate valuation, including the relevance of market value for valuation for lending purposes, how uncertainty in property valuations should be interpreted, and the relationship between market value and fair value in financial reporting.

Readers will also benefit from the inclusion of:

• A thorough introduction to the concepts, theories, methods and problems in real estate property valuation
• An exploration of the relevance of market value for valuation for lending purposes
• A practical discussion of how uncertainty in property valuations should be interpreted
• A concise treatment of the relationship between market value and fair value in financial reporting
• An examination of how concerns about sustainability and other structural changes can affect property valuation

Perfect for graduate level students in courses involving valuation or real estate, Advanced Issues in Property Valuation is alsoan excellent resource for real estate practitioners who wish to update and deepen their knowledge about property valuation.

1
Introduction

1.1 The General Purpose of the Book

There are a number of good basic textbooks on property valuation, e.g. Property Valuation by Peter Wyatt or the Appraisal Institute´s classic book The Appraisal of Real Estate.¹ These books present basic concepts and valuation methods with a focus on what you need to know to work with valuation issues in the real estate sector, either as a producer of valuations or in a position where you use valuations, and need to understand and evaluate valuations.

This book has been written as a type of ‘advanced’ textbook that problematizes a number of issues that are presented in the basic textbooks. Things in reality are often not as clear as they are in the basic textbooks. There are different views of how useful different concepts and methods really are. Some of the controversies about concepts and methods typically arise in specific episodes on the market, e.g. after a crash on the market or in situations where there seem to be very optimistic views among actors in the market that may raise concerns whether e.g. real estate assets are ‘overvalued’ in the market. Other differences relate to differences between countries and local traditions. Even though there are international cooperation and standardization, such differences still remain. The aim of the book is to introduce readers to these discussions and to make it possible to have well‐informed opinions on these issues. Some advanced textbooks focus on valuation of specific types of properties – from agriculture to hotels or special purpose buildings – but in this book, the focus is on what could be called more theoretical or conceptual issues, but also on some normative issues related to governance and the role of the valuer.

We think that there are at least two different audiences for the book. The first is students in courses on the Master level, where the student has already read one basic course in valuation or in larger basic courses, where the book can be used in the later part of the course. The book should also be useful in other academic courses, e.g. doctoral courses in real estate.

In an economy that changes quickly, there is also a need for courses for real estate practitioners who want to update and deepen their knowledge about property valuation. We have met the opinion that practitioners primarily want ‘cook‐books’ that tell them exactly what to do and that their interest in more conceptual and theoretical issues is limited. As teachers in a large number of such courses, we strongly disagree. In our view, almost everybody wants to understand what they are doing, why things are done in a certain way and alternative ways of looking at things. A broader perspective should also increase creativity and problem‐solving ability for practioners.

1.2 Overview of Issues Covered

The central concept of market value is discussed in Chapter 2. There are several issues that have been discussed concerning market value. Should the definition refer to prudent and knowledgeable actors when actors in the market are not always knowledgeable or prudent? Conditions that a good definition should fulfil are also discussed in this chapter. The connection between price and turnover also creates problems as observed prices alone then do not reflect the situation on the market. Problems with the concept of highest and best use are also discussed.

Other value concepts than market value are discussed in Chapter 5 that covers valuation for lending purposes, and in Chapter 6 about valuation in accounting contexts.

Chapter 3 looks closer at valuation methods. Typically, these are divided into sales comparisons, income and cost methods (or approaches), but what is really the logic behind this division? It is argued that some of the methods that are often called income methods really should be classified as sales comparison methods. A new classification of valuation is sketched. As properties are heterogenous, there are almost always a need to make adjustments for the remaining differences between the property to be valued and the objects compared with. Different such adjustment methods are also described. Finally, two more general issues are discussed in this chapter: Why is regression analysis not used more in 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 a...