Value in a Changing Built Environment E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 496

Veröffentlichungsjahr: 2017

Beschreibung

A new framework for understanding the underpinnings of real estate property value and the role it plays in the larger economy Value in a Changing Built Environment examines the professional foundations on which the valuation exercise and the valuation profession rest. Written by noted experts in the field, the book addresses the often limited understanding of the concept of property value by explaining the intrinsic linkages between economic, environmental, social, and cultural measures and components of property value. The book offers a framework that paves the way towards a more holistic approach to property value. Value in a Changing Built Environment unwraps many of the traditional assumptions that have underpinned market participants' decision making over the last few decades. The authors explore the concept that a blindfold application of valuation theories and approaches adopted from finance is unlikely to be able to cope with the nature of property as an economic and public good. This vital resource: * Explains the criteria for making estimates of value that can be applied worldwide * Offers an integrated approach to property value and the valuation processes * Captures the often illusive intangibles such as environmental performance into valuation * Addresses a market failure to account for wider criteria on building performance Value in a Changing Built Environment examines how real estate valuation plays a pivotal role in decision making and how can a new body of knowledge improve the practice in both business and social domains.

Leseprobe

Table of Contents

Cover

Title Page

Copyright

About the Editors

Note on Contributors

Introduction

Part 1: Gap Analysis: Anomalies and Paradoxes, Questions, Dilemmas and Motivations

Part 2: A Theory of Value in the Built Environment

2.0 Introduction

2.1 Economic Value: Value, Price and Worth

2.2 Sense and Categories of Value

Part 3: Valuation Methodology

3.0 Introduction

3.1 Aspects of Residential Value Analysis Methodology

3.2 Aspects of Commercial Property Valuation and Regressed DCF

3.3 The Significance of Land Attributes in Determining the Types of Land Use

Part 4: Empirical Applications of Market Analysis

4.0 Introduction

4.1 Directions for Exploration of New Methods of Identifying and Determining Relationships and Dependencies on the Real-Estate Market

4.2 Economic Sustainability, Valuation Automata and Local Price Development

4.3 Evaluation of Selected Real-Estate Markets – A Case Study from Poland

4.4 Cyclical Capitalization

Part 5: Towards a More Sustainable Real-Estate Market

5.0 Introduction

5.1 Professional Responsibility

5.2 Professional Approach

Appendices

References

Index

End User License Agreement

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Guide

Cover

Table of Contents

Begin Reading

List of Illustrations

Part 2: A Theory of Value in the Built Environment

Figure 2.1 Value categories of buildings.

Figure 2.2 Value map.

Part 3: Valuation Methodology

Figure 3.1 Risk premium spatial map.

Part 4: Empirical Applications of Market Analysis

Figure 4.1 Market areas, quality and accuracy of market analyses.

Figure 4.2 Permissible risk and sufficient accuracy of the result at individual levels.

Figure 4.3 Man versus computer in real-estate valuation.

Figure 4.4 The situation of the nodes in a three-by-two (3 × 2) map.

Figure 4.5 Illustration of the learning process of the SOM in two steps: in Step 1, the winner is determined, and its numerical value subsequently adjusted towards the observation vector; in Step 2, the numerical values of the other nodes are adjusted towards this winner, and the further they are situated on the map surface, the lesser is this adjustment.

Figure 4.6 The method of fixed time windows.

Figure 4.7 Development of prices in relation to incomes in Trondheim for the detached house type.

Figure 4.8 Development of actual and smoothed prices in Rosenborg 6 (NOK/m

2

for detached homes estimated with the SOM for annual cross sections).

Figure 4.9 Development of actual and smoothed prices in Stokkan 16 (as in Fig. 4.8).

Figure 4.10 Development of actual and smoothed prices in Utsikten (as in Figure 4.8).

Figure 4.11 The proposed sequence of procedures for the development and implementation of economic sustainability metrics.

List of Tables

Part 3: Valuation Methodology

Table 3.1 Categorisation of methods

Table 3.2 A sample of 20DCF inputs in Bucharest

Table 3.3 Descriptive statistics of DCF

Table 3.4 Sample of observations selected to apply model A

Table 3.5 Sample of observations selected to apply model A

Table 3.6 Calculation of logarithm

Table 3.7 Sample of observations selected to apply model A: standardization

Table 3.8 Regression output

Table 3.9 Regressed DCF as valuation method of MAPE

Table 3.10 Regressed DCF as valuation method of DR: model A

Table 3.11 Regressed DCF as valuation method of DR: empirical results

Table 3.12 Regressed DCF model A as valuation method of risk premium

Table 3.13 Application of model B: the observations

Table 3.14 Application of model B: the variables

Table 3.15 Application of model B: calculation of logarithm

Table 3.16 Application of model B: standardization of the variables

Table 3.17 Application of model B: regression output

Table 3.18 Model B MAPE as valuation method

Table 3.19 Regressed DCF as valuation method of DR: model B

Table 3.20 Regressed DCF as valuation method of DR: model B

Table 3.21 Regressed DCF as valuation method of risk premium: model B

Table 3.22 Model C: observations

Table 3.23 Model C: variables calculation

Table 3.24 Model C: logarithm calculation

Table 3.25 Model C: standardized variables

Table 3.26 Model C: multiple regression output

Table 3.27 Model C: regressed DCF as a valuation method

Table 3.28 Model C and its coefficients

Table 3.29 Model C: regressed DCF as a method to determine DR

Table 3.30 Regressed DCF as valuation of risk premium: model C

Table 3.31 Comparing regressed DCF models' performances

Table 3.32 Risk premium determination and geographical location

Part 4: Empirical Applications of Market Analysis

Table 4.1 Attributes influencing the value of residential real estate

Table 4.2 Real-estate market analysis in Poland

Table 4.3 Decision attributes on selected real-estate markets

Table 4.4 Sum matrix determined based on the matrix of the valued tolerance relation for decision attribute

D

1

Table 4.5 Decision rules for real-estate market analysis

Table 4.6 Indicator: population size per one RE transaction

Table 4.7 Indicator: real-estate affordability – the number of square metres that can be purchased with average monthly wages

Table 4.8 The use of the rough set theory (RST) for improving real-estate market analysis

Table 4.9 Premium group of cyclical capitalization models

Table 4.10 Secundum group of cyclical capitalization models

Table 4.11 The tertium group of cyclical capitalization models

Table 4.12 The quartum group of cyclical capitalization models

Table 4.13 Calculation of phase and Δ terms according to the backward holding period

Table 4.14 Calculation of overall capitalization rate assuming variable

Y

between 0.15 and 0.05 and the temporal length of the recovery recession phase equal to 4 years

Table 4.15 Calculation of overall rate assuming variable

Y

between 0.15 and 0.05 and the temporal length of the expansion contraction phase equal to 4 years

Table 4.16 Application of valuation n.1 of the primum group of cyclical capitalization models, assuming NOI equal to 1 and discount rate variation between 0.15 and 0.055

Value in a Changing Built Environment

Edited by

David Lorenz

Karlsruhe Institute of Technology Karlsruhe, Germany

Peter Dent

Oxford Brookes University United Kingdom

Tom Kauko

University of Portsmouth United Kingdom

This edition first published 2018 © 2018 John Wiley & Sons Ltd.

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Library of Congress Cataloging-in-Publication Data

Names: Lorenz, David, 1977- editor. | Dent, Peter, 1951- editor. | Kauko, Tom, editor.

Title: Value in a changing built environment / edited by David Lorenz, Karlsruhe Institute of Technology, Karlsruhe, Germany, Peter Dent , Oxford Brookes University, United Kingdom, Tom Kauko, University of Portsmouth, United Kingdom.

Description: Hoboken : Wiley, 2017. | Includes index. |

Identifiers: LCCN 2017042801 (print) | LCCN 2017045467 (ebook) | ISBN 9781119073659 (Pdf) | ISBN 9781119332596 (epub) | ISBN 9781444334760 (paperback)

Subjects: LCSH: Value. | Real property. | BISAC: BUSINESS & ECONOMICS / Real Estate.

Classification: LCC HC433 (ebook) | LCC HC433 .V35 2017 (print) | DDC 333.33/2-dc23

LC record available at https://lccn.loc.gov/2017042801

Cover Design by Wiley

Cover Image: © teekid/Getty Images

About the Editors

David Lorenz is co-chair of the Centre for Real Estate at the Karlsruhe Institute of Technology (KIT) where he is Professor for Property Valuation and Sustainability. David is also the director and founder of a real estate management, valuation and consulting firm located in the southern part of Germany. He has more than 15 years of experience in valuation, asset management and property development. He has published extensively on the role of sustainability in real estate management and valuation. David is a Fellow and Spokesperson of the Royal Institution of Chartered Surveyors (RICS). During the past years he was actively engaged with several research projects administered by RICS and UN.

Peter Dent is affiliated to Oxford Brookes University where he currently participates in International programmes in real estate valuation and finance. For eight years he was the Head of the Department of Real Estate and Construction before taking up the post of Comerford Climate Change Fellow in 2008. Latterly he was Director of International Programmes helping to develop and manage professional and academic programmes. Throughout his career in practice and in academia he has had close associations with the RICS and for the last ten years he has worked with the Institution to promote value systems and code of conduct across Asia. During his career he has published widely including two books (Property Markets and Sustainable Behaviour (2012) and Towers, Turbines and Transmission Lines: Impacts on Property Value (2013).

Dr. Tom Kauko is an academic labourer with wide remit within real estate economy and urban affairs. He received a M.Sc. degree in Real Estate in 1994 (Helsinki University of Tech, Finland), and a Ph.D. in Geography in 2002 (Utrecht University, The Netherlands). He has worked for Oxford Brookes University, UK, the Norwegian University of Science and Technology and OTB Research Institute, Delft University of Technology, The Netherlands. He has carried out research on urban real estate, housing and land-use studies. He is currently based in the historic seaside town of Portsmouth (UK), where he works with lecturing and research for the School of Civil Engineering and Surveying at the University of Portsmouth . His interest is in strategic issues such as valuation, sustainability, urban renewal, resilience, and innovations, and related spatial development and town planning issues. He has over 70 publications and c. 100 conference presentations.

Note on Contributors

Andrzej Bilozor graduated with an MSc in the Faculty of Geodesy and Space Management at the University of Warmia and Mazury in Olsztyn in 1999. In 2004, he obtained a PhD in technical sciences in the discipline of Geodesy and Cartography. In 2005, he was employed as assistant professor in the Department of Planning and Spatial Engineering at the University of Warmia and Mazury in Olsztyn. His major fields of research interest include Spatial Planning, Spatial Management, Geoinformation, Decision-Making Systems, Real-Estate Valuation, application of the fuzzy set theory. He is the author of more than 65 scientific publications.

Maurizio d'Amato is Associate Professor at DICATECh, Technical University Politecnico di Bari, Italy, where he teaches real-estate investment and valuation. He completed his undergraduate work in economics at the University of Bari and worked for several banks in real-estate finance sector before attaining his doctoral degree in Planning, specializing in Valuation methods, at the Politecnico di Bari. He has served as a contract professor in Real-Estate Valuation for several years and a faculty-appointed researcher at the Politecnico di Bari. He has been Scientific Director of the Real Estate Center of Italian Association of Real Estate Counselor (AICI). He has also been professor of Real Estate Finance at University of Rome III, Real Estate Appraisal at SAA School of Business Administration University of Turin and Real Estate Appraisal at online University UNINETTUNO. He is Fellow Member of Royal Institution Chartered Surveyors (since 2004) and Recognised European Valuer (since 2012).

Stephen Hill is a land economist and director of C2O Future Planners in London, an urban change consultancy. He has worked throughout England on the practice and policy of new housing growth and regeneration since 1970, in private, local authority, and housing association settings, in consultancy, and for English Partnerships. As its Head of Millennium Communities and National Standards, he coordinated the UK Government's executive agencies, Commission for Architecture and the Built Environment (CABE), the Housing Corporation in mapping and harmonizing their approaches and standards for sustainable buildings and places; the work was later absorbed (partly) into the Code for Sustainable Homes.

Thomas Lützkendorf, Prof. Dr.-Ing. habil, is director of the Centre for Real Estate at Karlsruhe Institute of Technology (KIT). He holds a PhD (1985) and Habilitation (2000) in the area of implementing sustainable development principles within the construction sector. Within the scope of teaching and research activities he is concerned with questions relating to the integration of sustainability issues into decision making processes along the life cycle of buildings. Prof. Lützkendorf is a founding member of iiSBE and involved in standardisation activities at European (CEN TC 350) and international (ISO TC 59 SC 17) level.

Malgorzata Renigier-Bilozor graduated with an MSc in the faculty of Geodesy and Space Management at the University of Warmia and Mazury in Olsztyn 2000. In 2004, she obtained a PhD in technical sciences in discipline of Geodesy and Cartography. In 2005, she was employed as assistant professor in the Department of Real Estate Management and Regional Development at the University in Olsztyn. Her major fields of research interest include Systems of Real-Estate Management, Value Forecasting, Decision-Making Systems, Real-Estate Valuation, Data Mining (especially application of the rough set theory). She is an author and coauthor of more than 70 scientific publications.

Radoslaw Wisniewski graduated with an MSc in the faculty of Geodesy and Land Management at the University of Warmia and Mazury in Olsztyn in 1997. In 1999, he obtained a PhD in technical sciences in discipline of Geodesy and Cartography. In 2000, he was employed as assistant professor in the Department of Real Estate Management and Regional Development at the University in Olsztyn. His major fields of research interest include Real-Estate Management, Application of Artificial Intelligence in the Real-Estate Market (especially application of artificial neural networks), Systems of Real-Estate Management, Value Forecasting, and Systems Theory. From 2005 to 2012, he was Vice Dean of The Faculty of Geodesy and Land Management at the University of Warmia and Mazury in Olsztyn. From 2012, he has been Dean of The Faculty of Geodesy and Land Management at the University of Warmia and Mazury in Olsztyn.

Introduction

At the time of the collapse of Lehman Brothers in 2008, the value of their real-estate holdings amounted to 23bn USD. Most of this was valued using the discounted cash flow (DCF) method and, almost exclusively, included office buildings and larger shopping malls. Since then, some of this portfolio has been sold, whereas others have been foreclosed. In 2011, the corresponding value diminished to an estimated 13.2bn USD, with received returns of 3bn USD during the 3-year period (2008–2011).

The fact that few have openly criticised this is bewildering – until one realises that apparently too much is at stake to get this mistake acknowledged. Two questions, however, arise about Lehman Brothers: (1) Why did the investors place 80% of their portfolio in the same ‘basket’? (2) Did they even see what was written in the appraisal reports? Perhaps, no one dares to ask these kinds of questions, because as in Shakespeare's comedy: ‘The more pity, that fools may not speak wisely what wise men do foolishly’.

As urgent as the financial crisis problem is, the range of problems affecting and being affected by property valuation issues is potentially much wider. It could also be argued that many of these problems – economic–financial, social–cultural and environmental–ecological ones – are interdependent. Therefore, this book sets out to look at valuation issues in general rather than focusing specifically on only one type of concern such as the so-called financial crisis. The logic underpinning how various kinds of real problems, misconceptions and dilemmas are interrelated, and possibly meshed with the ongoing sustainable development discourse, is a recurring topic of this book. Crucially, whilst sustainable development – or even real-estate sustainability – is not the sole focus of the book, the implications of this issue crystallise one key concern addressed within this book: the quality of valuations, that is to say, their reliability and robustness, transparency and traceability.

Apparently, the ‘whys and wherefores’ of valuation is an under-researched topic within real-estate economics. This is the principal justification for the selection of topics, and if the valuation process is one of the key topics of the book, another must be the basis of this valuation – that is to say, how empirical analyses of prior valuations and market evidence can help us reach such high-quality valuations. At the same time, homes, offices and other real estate that are subject to valuations need to be seen as part of a sustainable market context. However, the reinvestment of extra profits with long-term plans in mind – in other words, economic sustainability of real-estate-based assets, markets and values indeed – has also traditionally been a neglected topic (but see Bryson and Lombardi, 2009).

The aforementioned issues are the two lines we set up for our approach: one is about valuation seen as a process, and the other is about markets and other relevant context where value creation and price setting takes place. Thus, on the one hand, we are interested in how the valuer chooses to operate in a given situation; on the other hand, we are also interested in the changing environment within which the valuer eventually has to operate.

The Book's Main Theme

The way of perceiving the built environment is undergoing change. It has to, because of the new requirements attached to the sustainable development agenda (since the 1992 Rio Earth Summit, Local Agenda 21 and, more recently, the 2015 Paris Agreement hailed as an ‘historic turning point’) and the proposed policy solutions following the financial crisis of the late 2000s. Unfortunately, because of the complexity in the cause and effect in both our natural climate systems and our modern economic systems, there is unlikely to be a quick fix. However, beyond the complexity in the systems themselves, contributory factors may be intransigence, lack of understanding, lack of commitment or simply that the hegemony of money markets and their short termism makes it difficult to enable a broader-based interpretation of value where the currency of exchange is based on the environmental and social as well as the financial assets of a building.

This book explores the professional foundations on which the valuation exercise and the valuation profession rest. It aims to address this potentially limited understanding of the concept of property value by explaining the intrinsic linkages between economic, environmental, social and cultural measures and components of property value. In this way, it may be possible to pave the way towards a more holistic approach to property value.

Our conceptualisation of value goes beyond price. This is because we examine why a particular price is paid for a property asset, and we investigate in detail how professionals arrive at their estimate of value which will then influence their client's willingness to deal at a given price. Although, of course, price is based on estimates of value, this book attempts to unwrap many of the traditional assumptions that have underpinned market participants' decision-making over the past few decades.

When exploring the price–value association (or discrepancy), the book aims to incorporate social, environmental and economic concepts of value into a broader concept of property value. In doing so, the book puts forward the argument that a blindfold application of valuation theories and approaches adopted from finance is unlikely to be able to cope with the nature of property as an economic and public good. This claim is especially important at this moment in time, in a situation where the sustainability requirements being imposed are changing the decision-making environment concerning investment in the built environment.

Real-estate valuation plays a pivotal role in this decision-making, and we must ask ourselves the following question: how can this new body of knowledge improve the practice in both business and social domains, given the nature of specific professions – in our case, those pertaining to the real-estate industry? Hill and colleagues (2011) see this role ‘embedded in some ideals, professional values, autonomy of practice and independence of opinion’ (p. 315), and to be a professional requires not only a body of knowledge but also ‘a role definition and sense of identity; public interest; and ethical conduct’ (Hughes et al., 2013). Professional identity, independence, public interest and ethics therefore play a crucial role in a professional's assessment of real-estate valuation. As a process, such valuations therefore need to be sustainable in a broad sense. Here, we are concerned with financial sustainability, that is, how robust are the valuations performed to support investment decisions in the direct and indirect markets; environmental sustainability, that is, the impact of real-estate location, use and efficiency on the environment and social sustainability, that is, addressing the growing gap between those who have access and those deprived of access – both wealth creation and poverty creation and the impact on extremism at both ends.

The Book's Key Messages

The role of the valuation professional is to provide professional advice. This is not just about financial value, but it ought to, somewhere, cover the aspects of guardianship through appropriate management of landed and built assets. Too often, the advice is just about the price derived from limited criteria. This is more the role of an agent or a realtor and not of a professional adviser.

The role of the valuation profession is important in the struggle to implement sustainable development principles within the property sector in particular and within society in general. There are two main reasons for this: (1) ‘the building sector contributes up to 30% of global annual green house gas emissions and consumes up to 40% of all energy’ (UNEP SBCI, 2009, p. 3), and it therefore has the potential to provide the most cost-effective opportunities to cut down energy and resource use and to contribute to human health at the same time; (2) mainstream financial professionals and property market participants are less willing to include sustainability issues in property-related decision-making processes unless and until sustainable building features and related performance are integrated into property valuations. Deloitte (2014) believes that there is ‘substantial room for deepening sustainability implementation in certified buildings, where in-use performance can remain stubbornly below design expectations.’ (p. 2)

There are, however, some barriers to implementation. These are as follows:

A gap exists between the current situation (in which the challenges imposed by sustainable development create new pressures and realities) and state-of-the-art valuation theory, standards and practices.

Whilst it can be argued that in a growing number of cases, valuations reflect sustainable credentials of buildings, sustainable development thinking needs to be integrated at a deeper level into valuation theory, standards and everyday practice; that is to say, a new protocol or model for valuation and professionalism is needed.

Financial valuation methods and approaches do not really work for property assets because property is not traded in a perfect market.

We need to better understand what we are doing when assigning value to a particular building or groups of buildings; that is to say, while considerable attention has been paid to focusing on improving the performance of our value prediction models, much less time has been spent on advancing our understanding of the fundamental behavioural underpinnings that drive value and provide explanation as to how the property market works. Valuation methods have to reflect market sentiment as demonstrated through the prices paid. However, the valuer (as professional advisor) has a responsibility to make the investor become aware of all the implications of the value figure derived. How far therefore can a valuer influence value practice and eventual price?

The valuation exercise is not only a positive science; that is to say, valuers are not only here to ‘reflect the market’. Instead, valuers have a normative professional responsibility towards society at large, which adds a moral dimension to the property professional's valuation and consulting work. This is something that is challenged by scientists, scholars and academics trained in neoclassical economics (including more practical minded people such as valuers and business economists). The normative aspect may, for instance, concern the particular developments in terms of ‘value stability’ and ‘economic sustainability’ and the setting of enlightened (adaptable) recommendations for private investment as well as policy and planning.

To expand on the last point, it is not uncommon that policymakers (including policymakers in national governments, multilateral organisations and global corporations) use and look to economic theory and evidence in order to guide policy. Since policies – outlining and guiding humankind's, governments' and corporations' overall strategy and actions – are so vital for sustainable development, the economic discipline plays a crucial role. The increasing extent to which policymaking bears on economics raises the methodological question about the relationship between a positive science concerning ‘facts’ and a normative investigation into what ought to be or what is estimable. ‘Most economists and methodologists believe that there is a reasonably clear distinction between facts and values, between what is and what ought to be, and they believe that most of economics should be regarded as a positive science that helps policy makers choose means to accomplish their ends, though it does not bear on the choice of ends itself.’ (Hausman, 2003, Chapter 2)

This view is questionable, mainly because the discipline of economics is guided by values or by individual's views of what is right and wrong. Consequently, economics is greatly influenced by economic scientists' beliefs as to how people in fact behave (Hausman, 2003, Chapter 2). There is evidence that studying theories that are based on the assumption or principle that individuals are ‘self-interested’ (masters of nature) leads to people – and thus, to societies – who regard self-interested behaviour more favourable and to become even more self-interested (Marwell and Ames, 1981; Frank et al., 1993).

One argument put forward in this book is that ‘taking’ to achieve individual self-interest in itself is not sustainable. There has to be at least an equal level of ‘giving’ to sustain species self-interest. In the restricted area of real estate, this might be through lower profit margins or financial returns to provide higher efficiencies in resource consumption or through the positive embrace of green leases and green education. However, an overriding question in this whole debate is as follows: What is sustainability?

Put simply, sustainability embraces the financial, social and environmental decision-making in the field of real estate. The problem of virtual money becoming confused with real wealth has created a crisis in real-estate investment markets and consumer markets across the world. The impact on political life has been seen through a general lack of confidence and revolt against austerity measures which, in themselves, are attempts to redress the balance and achieve sufficiency against the excesses of the past decade. These measures have spread out into the social arena with protests, unemployment and poverty. Each of these are links in a chain which impinge on real-estate markets, whether residential, retail or commercial.

This evidence suggests that many societies have been living unsustainably (i.e. beyond both sufficiency and beyond affordability). As a whole, in all its dimensions, sustainability seems to be something outside the boundaries of our social systems (whether financial, social, political or physical): something that has a meaning but only in context within its own system. It is not a balance sheet or an air-conditioning system or a green space. Sustainability in the Hmong community in Vietnam is very different to sustainability in the Jewish community in New York City. Its meaning is parochial, but its actuality is universal. It is both inside and outside the system, and as such, it may be difficult to fully understand it. For example, often, we can only describe what is not sustainable, but even that can only be a partial judgement.

The concept, on the one hand, steeped in technical jargon, scientific formulae and inconceivable consequences creates a remoteness which is outside most people's sphere of experience/knowledge. In stark contrast, on the other hand, is the immediacy of a financial crisis, a parenting decision or a space heating solution – all of which have an impact on the levels of sustainability. There is therefore an ambivalence about the concept which allows arguments for ‘business as usual’ to abound. Nevertheless, we should strive to incorporate our own meanings to the concept in our lives (professional, social and private) in order to avoid potential destruction of the conditions of our reproduction (i.e. resources to sustain future generations). Specifically for the valuer, as a professional adviser, the ethics of sustainable solutions should form an important part of any appraisal and judgement when advising a client.

The Book's Methodology and Starting Points

This book necessarily addresses different areas within the property valuation context. We aim at a protocol partly at the higher level and partly at the detailed level of analysis. The book is a comprehensive whole of five parts, but with each part either meant as an essay (Parts 1 and 5) or as a collection of independent (or at least ‘semi-independent’) essays (Parts 2–4). The insights and conclusion from these contributions will eventually be used to strengthen and support the main argumentative chain and the book's key messages (Fig. 1).

Figure 1 Book methodology.

The book's starting points are a brief description of the current state of affairs, developments and changes and analysis of likely consequences for valuers, valuation theory and practice as well as an explanation for proposing an alternative protocol to valuation and decision-making processes in the property industry. This is further dealt with in the following:

Brief Description of the Current State of Affairs, Developments and Changes

When describing the current state of affairs, it is difficult not to mention the issues of climate change, economic cycles of boom and bust, worldwide inequality (particularly in an urban context) and the need to tutor the emerging economies. These are just some of the arguments on a macro level where there is an ever-increasing awareness – even worldview – about the set of disturbing problems facing the owners and occupiers alike. Climate change is getting more and more accepted as an overall paradigm – not only in natural sciences but also in social sciences and general economics. Even a relatively ‘hands-on’ discipline such as (spatial) planning has been reconceptualised to the core (see e.g. Bulkeley, 2006).

Ostensibly, climate change is causing glaciers and icebergs to melt as well as increased precipitation and storm floods and, subsequently, water level rise. This leads to flooding and other hazards, mainly in river and coastal zones, which become increasingly risky locations to live in. The inhabitants of these areas move away if they can. As such, the same areas have been economically prosperous for centuries due to the logistic possibilities associated with such locations. How many of the large cities of the world are located by the coast or are situated by the course of a main river? When these areas suddenly become unattractive for people and business alike, they also become prone to multiply increased financial risk (cf. Hill and Lorenz, 2011).

Further changes include the ‘investment climate’, in a situation where private and public investors are increasingly looking for new (i.e. more sustainable) approaches to investment (examples for this can be found in the publications of the United Nations Environment Program Finance Initiative). In these circles, there is a tendency to move away from a fixation on financial metrics and measures of performance alone. However, at the same time, property assets are also increasingly seen as a medium for short-term trading. This potentially can be a significant contributory factor in many of the problems that we are facing.

While there is also a strong focus on sustainability within the current political discourse as well as a tendency to increase the stringency of environmental legislation, these efforts are both neither fully translated into practice (lack of tools and mechanisms, etc.) nor sufficiently powerful to change behaviour (see the Copenhagen Climate Conference).

There is a considerable amount of literature on sustainability-related issues, regarding both the general economy and the property and construction industry in particular. However, whilst the majority of publications identify the problem, there is a lack of guidance on what to do next (i.e. practical courses of actions for individuals and professionals). In general, in professional life, there is more interest in defining and thinking about what professional ethics mean, rather than focusing on what consequences result from them, for professional practice.

Political and social value systems are strong and shape decision-making to a certain extent. An individual's behaviour is usually embedded in a social context. ‘Social and interpersonal factors continually shape and constrain individual preference.’ (Jackson, 2005, p. vii).

It is evident that in some parts of the world, value systems (of individuals and corporate) are changing. Certain businesses and investors start realising/understanding the benefits of taking responsibility towards the environment and society. Corporate Social Responsibility is becoming a factor of success. In some parts of the world, this takes place more rapidly than in other parts. This can happen for a number of reasons, for example, changes in material wealth and education and environmental change.

In general, it can therefore be argued that due to the changes/developments described earlier, there is a conflict/gap between current professional practice and the current business, societal and political reality (see Part 1 – Gap Analysis).

Analysis of Likely Consequences for Valuers, Valuation Theory and Practice

In such circumstances, the role of the professional valuer needs to be more multidimensional and pluralistic than it has tended to be in the past. The body of knowledge that underpins the profession needs to be broadened; stated differently, good (i.e. ethically and politically correct) professionals must update their understanding according to the requirements stemming from the arguments described earlier. To some extent, this is already happening: for example, the RICS has, over the years, produced a range of research publications addressing ‘green’ issues and sustainability, some in the context of valuation. In addition, the RICS has published several Information Papers and Guidance Notes on how to address sustainability considerations within valuation reports. They are intended to help to achieve this broadening of thought processes. For example, VPGA8 of the RICS Valuation – Professional Standards July 2017 (‘The Red Book’) advises that ‘while valuers should reflect markets, not lead them, they should be aware of sustainability features and the implications these could have on property values in the short, medium and longer term’ (p. 138). However, The Standards as a whole tend to emphasis the short term, as encapsulated in the mandatory bases of value set out therein.

At a more general level, we could argue that the knowledge required for professionalism always forms a part of a normative context. This, however, raises issues about professional ethics both at the micro and at the macro level. For example, do valuers have any obligation towards society at large or only towards their clients? In other words, do professionals have any social responsibilities? If so, how does a professional reconcile any conflict between these and the personal responsibilities to clients?

One of the key issues is the role that valuers perform in getting the message across. In the past, this tended to be at a fairly basic level when it comes to market value determination. However, it is a truism that the most direct route is often not the most efficacious. This is especially true where there is a need to assess the value of assets that have historically displayed non-linear performance. Such assessment often relies on a simple model using ‘bandwagon, network and lemming effects’ to arrive at a value. The contagious impact of these effects as they become ‘market data’ leads to ‘mistakes’ and increases their deficiency as comparable evidence when dealing with complex problems (Weil, 2010, p. 1447). At the moment, in many quarters, it seems that, despite all the sophisticated software and hype about sustainability, most valuers just want to ‘do the deal’ (often at any cost). So, is it just about money? Can all aspects of a property (its costs and benefits) be expressed in monetary terms to arrive at a ‘value’?

Jacobs (1994) sees the neoclassical approach turning the environment into a commodity. He goes on to say that ‘while allocating resources “optimally” in an economist’s terms … is certainly one way of conceiving the “most benefit” to society, it is not the only way … it is concerned only with individual preferences, and it measures only totals for all individuals not distributions between them'. This approach is therefore too simplistic. It gives meaning to things, and it ascribes value to those meanings. But meanings are derived from neoclassical logic, and in a way, this simply classifies ‘environment’ as a concept with clear boundaries and may therefore fail to acknowledge its total, global perspective and impact. In a way, we are seeking ontological meaning, not one-dimensional financial meaning. Money ‘translates the many-sided diversity of things … [as] homogenous’ … [and] … empties out ‘the core of things, their singularity, their specific value, their comparability’ (Lash, 1999, quoting Simmel).

In a way therefore, evaluating things in monetary terms deprives them of their primary significance. The sustainable environment exists for itself, it has existential meaning; to then ascribe a market value to it creates a distance between the subject (the environment) and the object (money). Once this becomes culturally accepted then, symbolically, the sustainable environment can be bought and sold as part of any privity of contract real-estate transaction. However, this privatisation fails to deal adequately with the social consequences of degradation to that environment.

Such meanings have to be translated into terms of transaction. This takes place in markets. In developed economies, these markets are sophisticated and exist within mature institutional frameworks. For example, Harvey (2000) identifies the following as the functions of the real-estate market.

To allocate existing real property resources and interests. In this way, an equilibrium market price is achieved. In this way, the market reflects preferences.

To indicate changes in demand for land resources and interests. These occur mainly due to expectations of future yields, taxation, income or tastes, institutional factors.

To induce supply to adjust to changes in demand. This can change by developing real property, changing existing interests.

To indicate changes in the conditions upon which land resources can be supplied, for example, improved construction techniques.

To induce demand to respond to changes in the conditions of supply.

To ‘reward’ the owners of land resources. This is a by-product of the market. There are two kinds of reward: Return on capital invested and Return for risk.

As such, the market and its agents are not only indicators of activity, they are also motivators. There is a positive role to play here. Valuations have often been accused of backward looking (i.e. a valuer will gather information from the past and then project forward to indicate income stream variability and/or capital value change over time). This tends to assume a static, passive market. However, property markets are dynamic, and valuers have an active role to play in generating that activity. The role of the valuer could be seen as not only indicating opportunities but also inducing change. This implies being at the cutting edge of knowledge on technological change and market movements but also the impact on value. In fact, the valuer is the arbiter of value and can, in some way, induce value, through information exchange. In the case of green buildings, how will the valuer value? The simple answer today is, in the same way that he/she has always valued externalities, through the market mechanism. If someone is willing to pay more, then, it is worth more; if not, then, it is not worth more. The valuers will ‘induce’ the highest price, but they cannot prescribe it (cf. Goering, 2005).

In fact, the problem is not so much with the process; after all, price is determined by supply and demand, and the valuer can only have marginal influence on its level in any particular market at any point in time. Sophisticated financial models can be used to demonstrate net benefits over the life of the building, and whilst this should not be eschewed, such future real benefits may have only limited impact on the drivers of value particularly if they relate to unborn generations.

In a way, this is again looking at the symptom and not at the cause. To find the cause, we might need to trace back through the valuer, his profession, the institutional framework, the economic and corporate cultures and politics (see Kauko, 2004b). This will involve examination of the institutional and environmental economics, social theory, behavioural studies as well as, more specifically, valuation methodology (i.e. dealt with more fully within Parts 2, 3 and 5).

Explanation for Proposing Alternative Protocol to Valuation and Decision-Making Processes in the Property Industry

We suggest a change to another model because cycles will eventually occur, but they need smoothing, in the face of financial losses for investors – and indirectly also the tenants. Ethical considerations must play a part as well; otherwise, these losses will spread beyond those directly involved to include, potentially, the globalised society at large.

While cycles of boom and bust occur, the property profession can do a lot to make them less damaging. Therefore, we suggest a different role for value analysis, because the relevant actors within the property industry need to add the smoothing and also ethical aspect to their mindset and business or administrative management strategy. While there are several professional practitioner groups with a direct stake (e.g. facility managers), intermediaries are also important in dealing with values. Among all professional groups, valuers have a very important mediating role; in order to be credible, their behaviour cannot afford to be detached from the behaviour of the owner and user groups.

But why is this a problem? Why should we care about the self-inflicted suffering of individual valuers? Is it not true that, in the long term, society regulates itself after each round of prosperity and crises? We need a final missing link in our argument here. It is because valuers represent authority to many actors, and when the same valuers make bad decisions, these actors bear the consequences. Therefore, the valuers' role is to take responsibility for their decisions/advice. Thus, they need to make solid decisions based on updated knowledge. In sum, while not necessarily the principal authority, the valuer is authority nonetheless. It is this authoritarian role that they must deserve, because they owe that much to those actors who inevitably will be affected by their decisions/advice negatively in the short term – be it merely financial losses or more dysfunctional circumstances such as social problems or environmental hazards. One of the main issues here is a perceived complacency among valuers. This potentially can create anachronistic market behaviours and is often born of a lack of imagination and willingness to challenge the current practice.

Our end argument is therefore that there can be an alternative protocol – at least one that recognises a social dimension to value. Moreover, we argue that the valuers must take a wider interest in the impact of their advice. While it may or may not be true that the more altruistic aspects are only considered by elites, a failure to adapt is likely to lead to missed business opportunities for a wide array of property professionals due to the threat of worsened reputation.

The overarching objective of this line of argument is to provide an alternative framework to consider for decision-making rather than to give advice to (and certainly not to) reform valuation practice. From an analysis of values (Part 2), we proceed to an analysis of valuation (Parts 3 and 4) and propose an alternative as food for thought. Finally, we try to locate the debate within the broad discussion of new value drivers (Part 5). We do not, however, advocate that traditional valuation frameworks or models are obsolete, simply that there is something beyond that, and as professionals, valuers should equip themselves to have a broader and deeper look.

We have inevitably different scenarios for different kinds of circumstances. Of course, we are encouraging socially and environmentally responsible investment policy. But within this setting, we believe in different elements for different professional or cultural groups. In doing so, indirectly, we accept that there are different characters of a place – and indeed different values – or at least different loadings for one value – attached to one and the same place. An example of this way of working is IGLOO Regeneration, a successful real-estate organisation that seeks not only to harness the history of community and place but also to create history through imagination, impact and identity.

The fact is that value systems change, and as a consequence, the basis for price premiums (and discounts) will change as well (e.g in relation to energy and social issues). English Partnerships, for instance, requires the client to meet a certain quality threshold before the price estimate is announced, thereby incorporating the normative element of valuation to their business model. Thus, in a changed value system, the role of the valuer should also change. This is our condensed message.

What follows is organised in five substantial parts. Part 1 explores the literature and identifies some more or less well-known ‘gaps’ which also are framed as research problems for us. In more specific terms, this part shows a discrepancy (hence gap) between existing and desirable state of affairs regarding how value and market definitions are treated in real-estate analyses. Part 2 deals with value from a theoretical point of view. After that, Part 3 discusses various methodological aspects of the treatment of our main themes: valuation, value, price, market and sustainability. Part 4 then switches to empirical and practical applicability issues within the framework identified by earlier parts. In doing so, it turns into somewhat different directions, namely the dynamic and localised context underlying valuation formation. Finally, Part 5 returns to the issue of valuation and addresses this in the context of professionalism. It also attempts to tie together all the aforementioned aspects and suggests some future courses of action.

Part 1

Gap Analysis: Anomalies and Paradoxes, Questions, Dilemmas and Motivations

Tom Kauko, Peter Dent, Stephen Hill, Maurizio d'Amato and David Lorenz

Background

One of the overarching issues of this book concerns the possible connection between the two meta-discourses of financial crisis (reasons, faults, repercussions, coping strategies and prospects), on the one hand, and sustainable development in its ecological–environmental (i.e. green), social, cultural and economic dimensions, on the other. Intuitively, one would, at least, see some overlap between the former discourse and the economic sustainability dimension; but, does a more profound look reveal, in addition, more subtle issues to take notice of within the broader spectre of the situation?

At first sight, one would doubt the existence of any such linkage; is it not true that, while the global property market downturn may be a temporary phenomenon, the sustainable development agendas and discourses require a longer time frame? To paraphrase Indy Johar, Zero Zero Architects, UK (discussion at EU Sustainable Energy Week, Brussels, 12 April 2011), (urban) sustainability requires a time span of at least two generations ahead. Furthermore, many (perhaps most) real-estate managers seem to be optimists and consider the crisis a temporary phenomenon as there is a belief in recovery such that, as soon as we are over bad times, the markets will pick up again, and at that time, being in a new market situation, we will also be able to command premiums for any sustainable features (e.g. Thiet, 2011).

However, there is a genuine concern that, whilst the global financial and property market downturn (with the most dramatic stage unfolding during 2007–2008) may superficially appear to be a temporary phenomenon, there may be more serious structural weaknesses in both markets. These relate to both the framework and the way in which the underlying value is assessed. Regarding the former, Shiller (2008) suggests that ‘we are running bullet trains on ancient track’ (p. 11), referring to the need for institutional reform to meet the nature of sophisticated global finance and real-estate instruments. Ailon (2015) makes the point, concerning the latter, that ‘financial market cultures should complement the technique-based focus with a focus on the hidden or yet uncovered “spirit” behind finance capitalism’s calculative ethos'. (p. 593). This spirit perhaps lies outside of a technical or institutional expression and sits more closely in the area of restraint and guardianship. In this sense, it relates more to Appadurai's embodied moral sensibility, ‘which precedes action or organization and amounts to a collective psycho-moral disposition’ (Appadurai, p. 519). If therefore the individual is moulded by the social, then there is an important role to be played by social and professional institutions in creating a sustainable environment in its widest sense (i.e. to include the environmental, the financial, the social and cultural).

Unfortunately, what, in part, seems to have happened to create and sustain the recent financial crisis is a gradual decline in collective responsibility which, in turn, encourages ‘a breakdown in moral codes releasing greed, hatred and delusive behaviour’. This then has the potential ‘to work against physical and biological laws and leads to a deterioration in society and nature’ (Daniels, 2003, p. 20). This creates a downward spiral of moral degradation, irresponsible actions and extremism. These, in themselves, tend to narrow individual's perspective of their power to succeed and the certainties of their rights and their particular points of view.

So, perhaps, the worst excesses of the financial crisis were caused by agents treating markets, mistakenly, as sources of too much certainty with the intention that this would disguise or mitigate layers of risk. This was achieved by applying such ‘magical practices’ as formatting, framing, likenesses, manipulations and charts as means to forecasting (Appadurai, p. 528). However, these tend to limit exposure to the range of uncertainties across a market and create potentially misleading data sets. This, in itself, then reduces enquiry and examination of situations. Much critical information remains unexamined, and decisions are made based on limited perspective.

What we seem therefore to have is a market with an inadequate institutional infrastructure to control activity and a methodology which has been pared to comply with a formula which provides short-term solutions. To address this in the context of both financial and environmental sustainability, there is a need for a combination of a robust process, a holistic method of evaluation, a risk mitigation strategy and an attitude of sufficiency (i.e. a combination of right method and right mindset).

In these circumstances, it would be helpful to encourage greater understanding through education which explores the interlinking of financial, economic, social, cultural, environmental and ecological matters in general – and real-estate matters in particular. Indeed, ‘black boxes’ in our knowledge regarding issues such as saving resources and combating poverty can and should be filled by the fruits of education, apt governance and technological progress. We need both more sustainably legitimate and financially sound behavioural models on all levels, ranging from the individual consumer and citizen to the small firms, via local community and governance interests, to corporate strategies and government agendas. Underlying this, ‘the mindset that caused environmental problems is not going to solve environmental problems’ (Dent et al., 2012, p. 11). This equally applies to the financial dimension.

Thus ‘yes’, the discoveries related to the financial crisis and sustainable development must be seen as belonging to the same overall paradigm shift. This relates to long-term administrative behaviour (via an institutional approach), long-term market behaviour (heterodox economics approach) and human behaviour in general (behavioural approach). These should be ‘long-term’ perspectives, and the valuer's behaviour ought to be fitted into this bigger picture. How this is achieved is an integral part of the narrative of this book.

Valuation is not just an information processing exercise. There are judgements and assumptions that have to be made which add a cognitive element. ‘Market value, in its role as a standard, provides a benchmark that market participants can use to compare various property interests, calculate rates of return/risk and evaluate relative investment strategies.’ (Ramsey, 2004, p. 350). However, the anomaly is that valuers also have a fiduciary role to help avoid conflicts of interest. The valuer is concerned not only with ‘problems of knowing value’ which is a cognitive role, but also with ‘providing an independent opinion of value’, a fiduciary role (Ramsey, 2004, p. 351).

Property Market Impacts

We do not know yet if the current global crisis is temporary or more permanent. Even if the former is true, we could argue that the damage done by the crisis has long-lasting consequences for the producers, consumers and intermediaries living off the real-estate industry. There ostensibly will be fundamental changes in the attitudes, demand and supply structures, markets, regulative measures and policy initiatives and, most certainly, directions taken by technological progress (e.g. Joss, 2011).

What is then the correct course of action? It would be rather difficult not to see any such changes as integrated onto the broader sustainable development discourse which, in one way or another, focuses on the need to improve the usage of Earth's resources – natural, material and human alike. At any rate, this has already been recognised in both ‘financial-’ and ‘sustainability-’biased circles: it seems to have been a combination of ‘infectious greed’ and ‘blind faith’ (Partnoy, 2010) that caused the financial crisis.

Property professionals and others involved in the property markets (financiers, developers, designers) need to have a broader understanding of the concepts of value and how value is determined. Existing practices and protocols of professional property valuation are increasingly recognised as inadequate and outdated when dealing with an increasingly sophisticated set of criteria. The paradox is that a market value provides a single figure to represent a set of unique untested criteria which exist at one point in time in a fixed location, whereas, in reality, clients more often need some measure of performance which incorporates an evaluation and provides an holistic impact assessment. This is a higher level of analysis where the main target is market signalling and structures rather than simply the technical issues in relation to estimation.

This is examined in more detail in Part 3 of the book. However, what we are doing throughout this book is to address an urgent and central concern of property valuers and other professionals involved with property value to understand and account for value in the property market. In doing so, we provide theoretical and practical insight into the criteria for making professional estimates and explanations showing how value is accrued and how it is distributed.

What we search for in this chapter is an innovative way to expand the current theory of value formation: for both organic value creation and intentional price setting mechanisms and processes alike. Here, we can provide a link to the economic sustainability concept and, in that way, to the broader sustainable real-estate debate once again.

Out of the Comfort Zone