RESEARCH REPORT
DECEMBER 2010
RICSRESEARCH VALUATION AND SALE PRICE REPORT EUROPEAN SUMMARY 2010
Research
Valuation and sale price report European summary 2010
The 2010 report of the annual comparison of valuations against sale prices of European commercial property, carried out for the Royal Institution of Chartered Surveyors by Investment Property Databank.
ŠRICS – December 2010 ISBN: 978-1-84219-650-2 Published by: RICS Parliament Square London SW1P 3AD United Kingdom The views expressed by the author(s) are not necessarily those of RICS nor any body connected with RICS. Neither the authors, nor RICS accept any liability arising from the use of this publication. This work was funded by the RICS Education Trust, a registered charity established by RICS in 1955 to support research and education in the field of surveying. Charts and graphs sourced: RICS/IPD
VALUATION AND SALE PRICE REPORT UK 2010
Contents
Foreword 04 Analysis and Findings
08
Contact details
11
03
Foreword
The Royal Institution of Chartered Surveyors (RICS) and Investment Property Databank (IPD) are proud to present the RICS Valuation and Sale Price Report 2010 which studies data from the IPD Annual Index across the four European markets of France, Germany, The Netherlands and the UK and compares this valuation data against the sale prices of commercial property. This is the seventh year that RICS has commissioned this study which has become an important barometer for the investment valuation community and makes a very welcome contribution to the transparency and integrity of our market place. The report is particularly important this year in light of the creation of the RICS European Valuation Professional Group Board, with member representatives from the main markets in Europe. Carlos Rodriguez, Director of Retail Consulting Group in Madrid appointed as Chairman of the Board says: “The RICS has taken a step forward in 2010 by creating a Board whose purpose is to lead the valuation specialism, and to develop knowledge and international standards in Europe. By working together across national borders, we can look at practice trends, emerging market needs and competitor activity, as well as identifying gaps, opportunities and threats and respond to them appropriately”. As part of this edition, we are also delighted to have received commentary from RICS Representatives of the RICS European Valuation Professional Group Board in France, Germany and The Netherlands. Valuations are key to performance measurement and pricing within the property industry. This report provides vital analysis of the performance of the valuation profession in some of the largest european property markets, by tracking the difference between valuations of real estate against actual sales. The first study was published in 2003 and since then the commercial real estate markets across Europe has experienced unprecedented change. 2004–2007 was characterised by unparalleled growth in capital values, only to be followed by the quickest and deepest falls on record between the summer of 2007 and 2009. Most certainly there were stark contrasts on a country-by-country level, but the conditions that prevailed during 2009, the period covered by this analysis, provides excellent opportunity to explore the performance of valuations during this volatile period. Following the quick downturn in the Autumn of 2008 as a fall-out of Lehman Brothers, there is no doubt that the year that followed presented a real test to the skills of property valuers worldwide, particularly relating to the speed that they were able to reflect market conditions. It is true to say that those who own, lend upon or occupy property assets feel more dependent upon expert valuation advice in an arena that has relied more on market sentiment than ever before due to a lack of comparable sales. 04
What is Market Value? The definition of “Market Value” can be found in both the International Valuation Standards and the Valuation Standards issued by RICS. It describes it as: “The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after property marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.” The words “willing seller” and “willing buyer” comprise a small section of the whole definition but understanding how this is to be interpreted is fundamental to the correct application of the basis of Market Value as a whole. The supporting explanatory text in the Standards makes it clear that a “willing seller” in the context of the definition is: “…neither an over-eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the property at market terms for the best price attainable in the market after proper marketing, whatever that price may be”. In other words, it is of no consequence that the actual owner of the property is not prepared, or “un-willing” to sell into a falling market. The preferences of the actual owner are irrelevant to the process of establishing market value. The seller in the market value definition is one who is actively in the market and looking to sell at the best price that can be achieved on the date of valuation. It is the nature of markets that values rise and fall with the passage of time. The real estate market is not isolated from this cycle; none is more obvious than its display of exactly that throughout the last 10 years. Indeed, due to the factors that drive demand and supply, the rises and falls of this asset class is often more profound than it is for others. Suggestions that there are no willing sellers in a falling market are sometimes made by commentators who have either little understanding of how markets operate, or have their own motives to change this definition. It is no more correct than saying that there are no willing buyers in a rising market. Those who have questioned rapidly downward valuations over the last few years must remember that it is the valuers’ role to track the market as they see it, not how they would like it to be. Some commentators have sought to blame valuers and valuations for the boom and bust of value in recent years. However, it is important not to lay blame at the messenger. An excellent analogy recently pointed out to the author of this note is that valuers are similar to journalists in that they are just reporting the news that is in front of them. They do not make the news, nor should they seek to drive it.
VALUATION AND SALE PRICE REPORT EUROPEAN SUMMARY 2010
Market Volatility Against the background of market volatility throughout 2009, what can be seen in the study is that there is a divergence between sale prices and valuations in Europe. The gradient of this rise or fall year-on-year is country dependent; nevertheless the proportion of sales within +/-10% was just 53% in Germany, 63% in France, 55% in the UK and 65% in The Netherlands. Whilst the statistics show that the spread has improved in both France and The Netherlands from 49% and 62% respectively the previous year, the results were somewhat worse in both Germany and the UK, where 60% of properties in both countries were valued within +/-10% the previous year. This could be somewhat explained away in Germany by the fact that the sample size was much smaller in 2009 than it was in 2008 (64 properties against 190 in 2008).
What we can determine is that no-one will pretend that trying to get to a precise valuation figure in an inactive market is an easy task. However, even in a market where empirical transactional evidence may be lacking, a figure arrived at using a judgement based on market understanding is generally more reliable than one based on an historic comparable transaction where all of the information may not have been available. Understanding the dynamics of the prevailing market, the appetite of the participants within it and the analytical skills to interpret available information, as well as knowing when to dig a little deeper, is the key skill set now required – and this is where the experienced valuer comes into his/her own.
So, is this divergence worthy of significant concern, or a natural consequence of a continued abnormal market? Jean-Philippe Carmarans, Managing Director, DTZ France states: “From a valuer’s perspective, the lack of transactions during the first half of 2009 made for an opaque market and the estimation of property values particularly difficult. There were also relatively few willing sellers during this period, which further complicated the understanding of where the market stood. Full analysis of the few transactions that did occur during this time was key in extrapolating the values on all market properties. Discussions which took place across valuation companies also helped ensure consistency in the yields applied”. Most certainly it is the job of the Valuer to understand the market in which they operate. When there is an abundance of transactions happening in the market place it is relatively simple to compare and contrast so as to obtain a seemingly accurate valuation. But what does a valuer do when transactions are lacking, as they evidently were in 2009? In this situation it would seem sensible to try and understand the fundamental economic drivers of that market and the mindset of would-be buyers and sellers. It means understanding why a property in the market is not selling and/or why another particular sector appears more popular. Essentially a market valuation is a proxy for a price and prices in the real world are not established by what has gone before but by the direction the market is heading and the expectations of purchasers and sellers. It is the valuer’s job to emulate this and reflect it in their valuation model.
05
Foreword
France
The Netherlands
In 2009, the French market experienced a very significant contraction in investment volumes. The total amount invested was €8.1bn, down from €13.1bn in 2008 and almost €30bn in 2007.
2009 was a year of two halves. Finance and investment confidence was low in the first half of the year, with investors being held back by lending constraints. The second half of the year showed that it was no longer this that was considered the greatest threat, but instead the number of vacant properties and decreasing rental values.
This decrease in volume was particularly weighted towards the first half of the year, as a consequence of the collapse of Lehman Brothers bankruptcy in September 2008. Its impact on the value of real estate was strongly felt during the first half of 2009 and much greater than the market correction recorded between October and December 2008, related to the timeframe involved in concluding a transaction, which can take several months. In the early part of 2009, investors expressed a preference for smaller lot sizes with values less than €50mn. It was not until later in the year that the focus shifted to higher value assets. French investors dominated the investment market with more than €4.3bn transacted in 2009, representing 65% of all transactions in Q3 and 54% in Q4. The price correction allowed Insurance Companies, SCPI (French open or closed-end property vehicle for French investors only) and OPCI (French open-end property vehicle) to re-enter the market, particularly towards the end of the year. Perhaps a distinguishing feature of the last quarter was the return, albeit timid, of US and UK investors to the French market, each representing around 10% of activity in the last three months of the year. German investors remained active throughout 2009 recording purchases of €1.3bn. Their preference for secure office assets in the Greater Paris Region’s central business district helped to stabilise yields on this type of property later in the year. Germany There are good reasons to consider 2009 as an historical year. Germany was facing a decline in GDP never seen in the post-war era. Whilst the German market proved more resilient to the impact of the crisis than several other European countries, the market still declined during the first half of 2009. It then switched tack and improved in H2, recording an investment turnover one third higher than in the preceding six months. However, to put this into context, its turnover was still somewhat 25% behind that recorded in 2008. Office vacancy rates increased to 11% across the seven major cities. The impact of this was to see a decline in rental value of 7%. You will note that IPD figures report capital losses of more the 10% for some property classes, resulting in an average annual total return of 2.5% in 2009.
06
The number of vacant properties increased in the market for users of office and industrial premises, with the yield gap between prime property and those in secondary locations widening also. A characteristic of 2009 was to see a large number of lease renewals, rather than movement into new space, as well as an increase in the number of partially disused business premises. ......So, where are we now? Everyone appreciates that the market has moved again somewhat since the analysis of 2009 sale prices against valuation findings. It appears that whilst transactions are starting to trickle through, they are often taking much longer than they used to. In the strong market of 2005 – 2007, the turn around from offer to completion could take as little as a few weeks. Against that background it took immense skill on the part of the valuer to hit, what was a rapidly moving market, in the correct place. In 2010 the market is starting to throw up other issues. A weak market can distort valuation figures in other ways not seen in stronger times, including the much slower speed in which they operate, price-chips in particular, and it has also been pointed out to us that the current market could start to question a hypothetical scenario of three months to sale completion set down as an average by many.
VALUATION AND SALE PRICE REPORT EUROPEAN SUMMARY 2010
Future challenges Property owners and occupiers are faced with more regulation than ever before. Changes to environmental legislation and financial reporting requirements are just a couple of the topical issues likely to impact upon valuation going forward. It is important that valuers appreciate the changes to client and public expectations. Absolutely, valuers are placed under more scrutiny than ever before, and those that do anticipate and respond to the change in the tide will be those that will do well. Naturally there will also be those that need more support from their professional body in terms of education, training and bringing back into compliance, so that they may also move forward and take advantage of the opportunities in the market place. RICS represents the gold standard in valuation globally. In order to maintain this standard and to drive the market and its’ professional members that work within it forward, it is introducing the Valuation Registration Scheme for those members carrying out valuations compliant with “Red Book” Standards. This registration and ongoing monitoring process seeks to ensure that consumers of valuation advice across the globe can rely on RICS qualified valuers to provide the very best advice available in the market place because: • RICS valuations comply with International Valuation Standards • members are bound by the highest professional standards contained within the Red Book and RICS Code of Conduct • RICS is the world’s most sought after property professional qualification in valuation • RICS has international regulatory reach over its members.
07 7
Analysis and Findings
Table 1: Valuation Price Differences, % 2009
France
Germany Netherlands
UK
Capital Growth
-7.1
-2.6
-5.3
-3.6
Un-weighted Average Absolute Difference
10.8
15.5
9.2
12.8
9.9
11.0
10.0
11.4
Un-weighted Average Direction Difference
-0.1
-3.2
-2.2
-1.0
Weighted Average Direction Difference
-0.6
-4.6
-4.7
-0.9
Weighted Average Absolute Difference
The IPD Valuation and Sale Price research study has been running for over 20 years and was first undertaken as a collaborative study with RICS, in response to the Carsberg report recommendations. This advised that the relationship between achieved sale prices and previous valuations should be monitored on an annual basis. The analysis in the European Summary covers the markets of France, Germany, the Netherlands and the UK at the All Property level and addresses several key questions: 1. How much do sale prices differ from previous valuations? 2. A re differences random or were sale prices consistently above or below the latest valuation? 3. How much did the results differ across the four European markets? Addressing these questions has involved market adjusting over 1 800 market valuations delivered across 2008/09 for average movement between valuation and sale dates and then applying a rigorous set of tests against the corresponding achieved open market transaction prices. A summary of the main measures referred to in this report: • Preceding Market Adjusted Valuation: - The most recent valuation in the IPD database which must have been recorded a minimum of three months prior to the sale date. This is then adjusted for market movements in values by applying capital growth rates up to the 3rd month before the sale. Finally, capital expenditure between the last actual uninfluenced valuation month and the updated valuation month is added to the updated valuation.
08
• Average Price-Valuation Differences: - Average Absolute Difference – the average difference between an asset’s sale price and its preceding Market Adjusted Valuation regardless of whether the adjusted valuation is above or below the sale price. - Average Direction Difference – the simple difference between an asset’s sale price and its preceding Market Adjusted Valuation. - Differences are analysed on both an un-weighted and value-weighted basis with the latter assigning greater importance to more valuable assets. The headline 2010 findings across the four major markets were as follows: • I n 2009, the value weighted average absolute differences between sale prices and preceding Market Adjusted Valuations ranged from 9.9% in France to 11.4% in the UK. Treating all valuations equally – regardless of value – Germany reported the widest spread, at 15.5% • I n the past, there has been evidence to suggest that current market trends are related to the difference between the sale price of an asset and its preceding Market Adjusted Valuation • A verage weighted direction differences, which measure whether values were under or over stated, were negative in all four markets
VALUATION AND SALE PRICE REPORT EUROPEAN SUMMARY 2010
• T he Netherlands was the only market where the majority of assets were sold at prices below their preceding Market Adjusted Valuations (Figure 1). When compared to 2008, all markets, bar the UK, saw a fall in the proportion of assets sold at prices above the preceding Market Adjusted Valuation which probably reflected the further (and accelerating) deterioration of capital values in these markets • A lthough the UK saw a significant increase in asset sales above valuation (compared with 2008) just over half were still sold below their preceding valuation • In 2009, the Netherlands and the UK both saw an increase in the weighted average absolute differences compared to 2008. In France and Germany, these differences decreased – an indication that on average, sale prices were closer to their preceding Market Adjusted Valuations in these two markets (Figure 2) • H istorically across all four markets, the trend was for more valuable assets to be sold at prices closer to their preceding Market Adjusted Valuations, as indicated by lower weighted than un-weighted average absolute differences. 2009 saw a continuation of this trend in all markets, apart from the Netherlands, where smaller assets were sold for prices closer to their preceding valuations.
Figure 1: Proportion of sales sold above/below their preceding Market Adjusted Valuation, % 2009
Figure 2: Weighted Average Absolute Differences, % France
Below
Germany
Netherlands
UK
18
Above
16 14
France
12 10
Germany
8 6
UK
4 2
Netherlands
0 -80
-60
-40
-20
0
20
40
60
80
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
09
Analysis and Findings
• On an un-weighted basis, assets in Germany were sold at the biggest discount to preceding Market Adjusted Valuation • With the exception of the UK, the larger, more valuable assets were sold at greater discounts to their preceding valuations than smaller, less valuable assets. (Figure 3) • The larger discounts to preceding valuations in Germany and the Netherlands may be evidence of lagged valuations or a market turnaround in France and the UK, with the UK reporting positive capital growth in the second half of 2009. (Figure 4) Figure 3: Average Direction Differences 2009, %
• The spread of sale prices about preceding valuations was much tighter in France and the Netherlands in 2009 with a noticeably higher proportion of transactions sold for within +/-10% of the preceding Market Adjusted Valuations than in 2008. (Table 2) • The Netherlands displayed the tightest of all the spreads, with 88% of properties sold for within +/-20% of the preceding Market Adjusted Valuation.
Figure 4: Capital Growth, H1 and H2 % 2009 H1
Un-weighted
France
5
UK
0
Netherlands
Germany -5
-4.5
-4
-3.5
-3
-2.5
-2
H2
10
Weighted
-1.5
-1
-0.5
0
-5 -10 -15 France
Germany
Netherlands
UK
Table 2: Distribution of Transactions by Average Un-weighted Direction Difference Bands, % 2009 (2008)
+/- 10%
+/- 15%
+/- 20%
France
63 (49)
78 (68)
86 (79)
Germany
53 (60)
59 (68)
69 (77)
Netherlands
65 (62)
76 (82)
88 (85)
UK
55 (60)
71 (73)
82 (83)
Table 3: Sample Sizes, 2009
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
France
27 97 123 262 366 355 370 402 485 527 519 505
Germany
30 77 85 142 313 247 300 257 617 483 190 64
Netherlands 148 228 210 369 487 418 286 361 296 318 197 197 UK
10
1274 1648 1114 1318 1340 1216 984 1006 1020 903 1233 1042
VALUATION AND SALE PRICE REPORT EUROPEAN SUMMARY 2010
Contact details
For further information please contact: Shan Lee Research Manager
David Rusholme Director of Valuation
IPD RICS 1 St John’s Lane Parliament Square London London EC1M 4BL SW1P 3AD t +44 (0)20 7336 9345 e shan.lee@ipd.com w ipd.com
t +44 (0)20 7695 1762 e drusholme@rics.org w rics.org
11
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