Читать книгу Property Investment Appraisal - Andrew E. Baum - Страница 15

The aftermath of the real estate downturn in the early 1990s sparked a huge interest in valuation techniques. Despite continuing interest in the valuation process, the GFC does not appear to have had the same effect. This is partly because the 2007 crash was a global asset/financial market crash and not an occupier-driven crash, as was the case in the 1990s. As we will demonstrate, conventional valuation methods become very troublesome when the current rental income is no longer to be relied upon as a good indicator of future cash flows. Nonetheless, the GFC did lead to a search for a more appropriate valuation basis and method for assessing property values for bank lending purposes, as reflected in Chapter 10, which has been added to this edition. After the GFC, more interest also developed around issues such as bank lending covenants (e.g. loan to value ratios), comparative valuations in markets where transactions were sparse, and the valuation of open-ended funds.

In contrast, the early 1990s occupier market crash led directly to an increased interest in valuation techniques from UK clients and valuers, and from those whose role it is to comment on valuation practice. This process had started at the time of writing the second edition of this text in 1994/1995, but, despite the criticism of conventional valuation techniques contained in that edition and in other works that followed over the next 10 years, conventional approaches still dominated the UK market valuation practice in the pre-GFC period in which the third edition was produced. This was in increasing contrast to some other mature real estate markets in which discounted-cash-flow (DCF) valuations dominated (for example, Sweden). Despite the GFC, nothing seems to have changed in this regard and UK market valuation by conventional techniques, set out and critiqued from Chapter 4 onwards, still dominates practice, albeit often checked by DCF-based Investment Valuations.

Why is the UK more wedded to comparative conventional techniques than some other markets? Despite some high-rise development and the increasing importance of multi-let large-scale shopping centres, the UK still has much – albeit a decreasing amount of - prime property investment stock let on long leases to single occupiers. The typical institutional UK lease was traditionally the longest in the world and, despite major changes since 1990 (see Crosby et al. 2005 and the annual UK lease review produced by MSCI), has had the added benefit of upward-only rent reviews and ‘triple net’ rents. This has produced simple, low-risk investments with limited variability of cash flow. In these circumstances, the initial rent can explain a large proportion of the value of the asset and so the development of a comparative valuation method based on capitalising the initial rent can be understood. Given these physical and leasing characteristics, it is no great surprise that UK valuations persist in adopting simple comparison-based valuation methods rather than DCF-based approaches to appraisal. This is increasingly dangerous; the unsustainability of retail rents is a clear example, set in sharp focus by the COVID-19 crisis. To repeat ourselves: conventional valuation methods become very troublesome when the current rental income is no longer to be relied upon as a good indicator of future cash flows.

As in previous editions, we set out in this edition to show that the cash flow approach, described in detail in Chapter 3, has significant advantages and no disadvantages compared with simple conventional models. Cash flow models can perform the Market Value role just as efficiently and accurately as conventional models, and they can be adjusted to meet the requirements of definitions of Investment Value and sustainable value. We believe that they are the basis for identifying market under- and over-pricing and that they have a significant role to play in the regulatory processes underpinning lending secured on commercial property.

Therefore, despite the relative lack of change over the years since the first edition, time has not dimmed our enthusiasm for this argument. We do not believe that having a relatively transparent, high-turnover market, as in the UK, gives valuers an excuse to develop simplistic rules of thumb to make up for the heterogeneous nature of the asset, and the basic cash flow model can be adapted for the numerous roles demanded by the various definitions of value and the requirement of different clients. As a result, we will continue to argue for a rational valuation model; the rest of this book is our attempt to further develop this argument. In doing so, while we focus on the UK market in detail (and many of the examples relate to this market), the issues around processes, inputs and judgements are similar the world over and many of our examples are generic with plenty of relevance to global real estate.

To sum up, our proposed rational valuation model will have two distinct applications. The first of these is market valuation; this means to fix a price for an asset, or to predict the most likely selling price of an asset. The second is investment appraisal. This means to estimate the worth or value of (an asset).

The book is concerned with the difference between these two terms. In simple terms, a market valuation will tell us what a property asset is likely to sell for. An investment appraisal will tell us what the asset is worth to us. Should we pay the market price – or not?