Commercial Property Valuation Research Articles

Optimism in Property Markets

House valuation involves forecasting household demand for a neighborhood, whereas commercial property valuation involves forecasting area economic activity. Yet, we show optimistic expectations for both. We investigate further possible disparities due to different cultures of home ownership, short, medium, and long-term investment horizons, and bullish or bearish trends. We use an experimental framework to demonstrate expectations are optimistic under all conditions. Buyers use trends to surmise future prices in bull markets, expect price increases in oscillating markets, and price reversals in bear markets, failing to anticipate price busts. Policy implications are important in preventing property boom-induced financial crises.

Climate risks and their implications for commercial property valuations

PurposeThe authors outline a framework that captures the channels through which physical climate risks could affect cash flows and pricing of income-producing real estate. This facilitates detailed consideration of how the future performance of real estate investments could be affected by such risks.Design/methodology/approachThis is a literature-based investigation that draws on work commissioned by UNEP-FI (Clayton et al., 2021a, b). It extends this work to consider in more detail the channels through which climate risks may impact property performance and the implications for the valuation community.FindingsRecent empirical studies have identified more instances where pricing is reflecting both current and anticipated climate risks. Market valuations cannot properly incorporate climate risk without clear evidence that it is priced by market participants, but valuers can advise clients on the potential for future impacts.Research limitations/implicationsWhile inferences can be made from studies of residential real estate, more research on commercial real estate pricing and climate risk is required to assist valuers and their clients, as well as other stakeholders in the real estate market.Practical implicationsDifferences between a Market Value and an Investment Value context are considered, and how valuers could and should account for climate risk in each setting is discussed with reference to existing professional standards and guidance.Originality/valueThe article synthesises a wide range of literature to produce a framework for the channels by which real estate values could be influenced by climate risk.

A Modified UK Real Value/Short-Cut DCF Model for the Valuation of a Nigerian Sub-Leased Commercial Property

A UK real value/short-cut DCF model that addresses the valuation of geared profit rents generated by sub-let commercial investment properties especially in climes with nationalized land policy has been elusive. This study examines the modification of the extant UK real value/short-cut DCF model for the valuation of head-leased occupancy rights with fixed and non-revisable ground rents pursuant to the provisions of the Nigeria Land Use Act. The model is developed by blending the inputs of the modified rational model with that of the Crosby's real value/short-cut DCF model leading to a valuation model that appears simplified compared to the existing UK contemporary value models. The gearing effect for the hypothetical case of sub-let head-lease occupancy right in Nigeria is manifested as having a diminishing impact of fixed ground rent on profit rent calculation. For the valuation case study involving this hypothetical head-leased occupancy right in Nigeria, it was found that the modified UK real value/short-cut DCF model produced valuation that is identical to those churned out from the full DCF, modified rational, and Crosby's real value/short-cut DCF models. For the same hypothetical case study, less than 1% difference is observed between valuations from the all risks real yield (ARRY) model, which evolved in New Zealand and the valuation produced from the modified UK real value/short-cut DCF model, thereby validating all methods against each other. In consonance with the International Valuation Standards pertaining to income valuation approach, a sustained pedagogy of emerging real value models alongside the extant nominal valuation models is suggested as a way forward. Nevertheless, the modified UK real value/short-cut DCF model is recommended as an alternative to the extant variants of real value and explicit DCF techniques for the valuation of sub-let head-lease occupancy rights with fixed/non-revisable ground rents payable especially in climes with nationalized land policy.

Modeling the Commercial Property Value Using Ordinary Least Squared (OLS): A Case Study of Putatan, Sabah and Limbang, Sarawak

Real Estate is an asset that provides profitable investment in return. Commercial property constitutes an important part of the real estate sector. In valuing commercial property, rental value is an essential component for valuers in applying valuation methods. Determining the rental value usually a difficult process as it involves a lot of influence factors. There are various factors that can be used but not the same for every commercial property. Therefore, this paper shows the modeling valuation comparison between two commercial property areas of Putatan and Limbang that represent the outskirts of the city in Sabah and Sarawak respectively. The purpose of this study is to find an effective approach to develop a suitable model for commercial property valuation using OLS and subsequently intends to identify factors that influence the commercial properties for both study areas. The OLS technique was used for this study to develop the property valuation model in Putatan and Limbang. The outcome shows that both study areas can be modeled using OLS for property valuation using similar factors but the Limbang area produced higher accuracy than Putatan based on the adjusted R2 value. However, in terms of the significant of the property value influence factors, both Limbang and Putatan produced different significant factors. Thus, it shows that most of the outskirt city commercial property valuation must be modeled using different influence factors. The model will benefit the local authorities, especially for commercial property valuation. Ultimately, revaluation also can be done easily with low cost, less time and few people needed for this approach.

Flood risk insurance, mitigation and commercial property valuation

PurposeThe purpose of this paper is to understand how built environment professionals approach the valuation of flood risk in commercial property markets and whether insurance promotes mitigation in different insurance and risk management regimes, draw common conclusions and highlight opportunities to transfer learning.Design/methodology/approachAn illustrative case study approach involving literature search and 72 interviews with built environment professionals, across five countries in four continents.FindingsCommon difficulties arise in availability, reliability and interpretation of risk information, and in evaluating the impact of mitigation. These factors, coupled with the heterogeneous nature of commercial property, lack of transactional data and remote investors, make valuation of risk particularly challenging in the sector. Insurance incentives for risk mitigation are somewhat effective where employed and could be further developed, however, the influence of insurance is hampered by lack of insurance penetration and underinsurance.Research limitations/implicationsFurther investigation of the means to improve uptake of insurance and to develop insurance incentives for mitigation is recommended.Practical implicationsFlood risk is inconsistently reflected in commercial property values leading to lack of mitigation and vulnerability of investments to future flooding. Improvements are needed in: access to adequate risk information; professional skills in valuing risk; guidance on valuation of flood risk; and regulation to ensure adequate consideration of risk and mitigation options.Originality/valueThe research addresses a global issue that threatens local, and regional economies through loss of utility, business profitability and commercial property value. It is unique in consulting professionals across international markets.

MEDIATION EFFECT OF SOCIAL ASPECT IN THE RELATIONSHIP BETWEEN ENVIRONMENTAL AND ECONOMIC ASPECTS: THEIR INFLUENCE ON THE VALUE OF GREEN COMMERCIAL OFFICE PROPERTY

The potential value of green buildings is generally attributed to attractiveness for occupiers due to the environmental aspect which brings an impact to the social action, which eventually influences the economic aspect. These three aspects of sustainability (environment, social and economic), which adopted from Concentric Ring model contained various attributes. These attributes may or may not have significant influence among them, thus act as an indicator in impacting the green commercial office building’s value. Accordingly, it is substantial to identify which attributes of green commercial office property have significant relationship of sustainability and to what level of influence among them, including the role of social aspect as a mediator between environment and economic aspects of sustainability. In order to analyse the hypothesized relationships, this study collects quantitative data from the property holders and also end users (tenants and owner-users) of green commercial office building, as they experience the benefits of sustainability in the building. Data were analysed using confirmatory factor analysis (CFA) with IBM SPSS Statistics 20.0 and AMOS 19.0, respectively. The results show that all hypothesized relationships between environmental, social and economic aspects were supported and indicated significant relationships among them, hence become a fundamental of green commercial office property valuation framework development.

MEDIATION EFFECT OF SOCIAL ASPECT IN THE RELATIONSHIP BETWEEN ENVIRONMENTAL AND ECONOMIC ASPECTS: THEIR INFLUENCE ON THE VALUE OF GREEN COMMERCIAL OFFICE PROPERTY

The potential value of green buildings is generally attributed to attractiveness for occupiers due to the environmental aspect which brings an impact to the social action, which eventually influences the economic aspect. These three aspects of sustainability (environment, social and economic), which adopted from Concentric Ring model contained various attributes. These attributes may or may not have significant influence among them, thus act as an indicator in impacting the green commercial office building’s value. Accordingly, it is substantial to identify which attributes of green commercial office property have significant relationship of sustainability and to what level of influence among them, including the role of social aspect as a mediator between environment and economic aspects of sustainability. In order to analyse the hypothesized relationships, this study collects quantitative data from the property holders and also end users (tenants and owner-users) of green commercial office building, as they experience the benefits of sustainability in the building. Data were analysed using confirmatory factor analysis (CFA) with IBM SPSS Statistics 20.0 and AMOS 19.0, respectively. The results show that all hypothesized relationships between environmental, social and economic aspects were supported and indicated significant relationships among them, hence become a fundamental of green commercial office property valuation framework development.

Expert problem solving practice in commercial property valuation: an exploratory study

PurposeThe purpose of this paper is to identify the core dimensions of problem solving of experts in commercial valuation in order to provide a rich stimulus for managing current practice and enabling future development.Design/methodology/approachThe study adopted a cognitive position but emphasised understanding the everyday commercial property valuation practice in a naturalistic context and from the participants’ perspectives. Given this, a grounded theory approach was employed as a research strategy to guide the data collection and surface theoretical interpretations. Data were obtained through in-depth interviews with practicing valuers working in private real estate firms within metropolitan Birmingham, UK.FindingsThe interviews uncover four dimensions of experts’ problem-solving practice in commercial valuation: multidimensional, domain-specific knowledge base; cognitive process that is centred on analysis and reflection; collaborative problem-solving venture with colleagues; and professional practice issues awareness. A conceptual model is proposed which integrates these dimensions enabling a clearer understanding of the nature of valuation work.Research limitations/implicationsThis study was designed to be descriptive and theory generating, thus, the findings cannot be generalised as the sample was confined to one city and consists of a small number of senior practicing valuers. Therefore, the findings may not be fully applicable to other practicing valuers, other geographical locations or more widely to other types of property valuation. Nevertheless, the findings provide an important cognitive framework which can be verified by other researchers seeking to examine the practice of expert valuers.Practical implicationsThe identification of the core dimensions of expert problem solving in commercial property valuation is shown to have implications for valuation practice, education and continued research. The valuation practice environments need to develop mechanisms to provide time that would enable these multi-dimensions of professional competence to be developed. Further work is needed to expand and refine the model across expert practice in other specialty areas of valuation practice.Originality/valueThis study expands the current understanding of valuation process to areas of expertise that have received less coverage in behavioural valuation literature, that is, the central role of knowledge and cognition and how these are integrated for effective valuation problem solving and decision making.

Effects of valuation variance and inaccuracy on Nigerian commercial property market

Purpose – In the absence of continuously traded, deep and securitised markets, commercial property valuations perform a vital function in the property market by acting as a surrogate for transaction prices. The ability of valuers to make effective estimation of value is therefore a vital issue in commercial property market. The purpose of this paper is to examine the effects of valuation variance and inaccuracy on Nigerian commercial property market. Design/methodology/approach – Questionnaires were used in collecting data from 163 randomly selected estate surveying and valuation firms in Lagos Metropolis with a record of over 60 per cent of the total population of estate surveying and valuation firms in Nigeria. Both descriptive and inferential statistics were used to analyse the data collected. Findings – The results revealed that valuation variance and inaccuracy causes fluctuation in the price of property, sending wrong signal to the market participants and jeopardising the future of commercial proper...

Authorised property appraisers’ perceptions of commercial property valuation

Purpose– The purpose of this paper is to describe and analyze the thought patterns of authorized property appraisers (APAs) when valuing commercial properties, and draw conclusions about their collective thinking in terms of content, complexity, and homogeneity.Design/methodology/approach– A standard set of value-adding factors and bipolar constructs was included in a grid form used for data collection. The repertory grid technique and principal component analysis were used to map and analyze the thought patterns of nearly half of the APAs in Sweden.Findings– Analysis of the mean grid for all respondents revealed three dimensions in the aggregated APA thought pattern: property object – property market focus, abstract – specific information, and expert – superficial assessments. The aggregated thought pattern was found to be moderately complex, and the APAs demonstrated relatively strong homogeneity in their thought patterns.Practical implications– Based on the moderate complexity and relatively strong homogeneity in respondent thought patterns, this study discusses the upcoming establishment of a profession.Originality/value– To the authors’ best knowledge, this is the first study using the repertory grid technique to map and analyze APA thought patterns at an aggregated level.

Incorporating Green Building Features and Initiatives into Commercial Property Valuation

The rapid acceptance of green buildings internationally has led to awareness of green building features and initiatives (GBFIs) in the South African property industry; however, among South African valuers, it seems the awareness is still in its infancy. Semi-structured interviews were conducted with valuers of varying degrees of experience in Cape Town, online surveys were completed by a sample of South African valuers, and a valuation simulation was conducted to determine the impact of GBFIs. The findings indicate that even though South African valuers have limited knowledge of green buildings, they recognize the importance of incorporating GBFIs in the valuation process.

Financialisation, the valuation of investment property and the urban built environment in the UK

The financialisation literature has been criticised for its limited empirical base and its failure adequately to link the everyday world with that of high finance. The paper addresses these shortcomings by examining the calculative practice of property valuation. The way that valuations are performed affects their results and, therefore, the operation of the property market. The paper traces the evolving influence of finance capital on the valuation of commercial property in the UK by constructing a historiography of investment valuation since 1960. Traditional approaches to valuation have been increasingly challenged by those derived from financial economics. However, the former remains the dominant method for undertaking market valuation. Its grounding in comparison – a centring and standardising process – offers an explanation for some of the changes in the urban built environment that are ascribed to financialisation. This suggests that a more detailed and historically sensitive interpretation of financialisation is required.

The incorporation of sustainable features in commercial property valuation

The incorporation of sustainable features in commercial property valuation

Accuracy of Swedish property appraisers’ forecasts of net operating income

This study addresses how property appraisers forecast one important component of the commercial property valuation model: net operating income. We compare appraisers’ ex ante forecasts with corresponding ex post figures from company financial reports. The data are from the Swedish Property Index, 1998–2005, and comprise over 7000 observations. The findings indicate that the appraisers’ forecasts are somewhat forward looking and almost as accurate as those obtained using mechanical autoregressive models. However, the forecasts are biased, as appraisers systematically overestimate future net operating income. There was also evidence of decreasing accuracy over the study period.

Assessing Client Perceptions of the Quality of Commercial Valuation Reports in Malaysia

A property industry survey of major external users of commercial valuation reports in Malaysia was conducted in September 2008 to assess the client perceptions of the quality of commercial property valuation reports in Malaysia; this being the first such client satisfaction survey in a developing property market. This client satisfaction survey highlighted the perceived stature and integrity of the commercial valuation reports in Malaysia and the high levels of client satisfaction in valuations for all commercial property types. Concerns were raised in a number of key areas, with proposed solutions to these weaknesses identified. Ongoing issues for ISM and BOVAEA regarding the continued enhanced stature of the valuation process, valuation practice standards, valuation reports and public confidence in valuers in Malaysia are identified.

Commercial Real Estate Valuation, Development and Occupancy Under Leasing Uncertainty

A model of commercial property valuation is developed where individual property owners are price takers and tenants randomly arrive and depart. Spot lease and tenant reservation prices are stochastic and correlated and can divert from but eventually revert back to market equilibrium. Within this framework we examine built property values and vacancy rates for varying parameter sets representing differing markets and economic conditions. We also examine how potential and existing vacancies, spot lease prices and tenant reservation prices feed back into development decisions. We demonstrate how preleasing acts as a hedge to the developer against the risk of leasing uncertainty.

Addressing risk and uncertainty in property valuations: a viewpoint from Germany

PurposeThe purpose of this paper is to propose and discuss practical approaches on how to address risk and uncertainty within valuation reports, particularly when there is only insufficient comparable transaction evidence available.Design/methodology/approachA four stage approach to property valuation is proposed that can be particularly useful if there is insufficient comparable transaction evidence available: Identifying, measuring and expressing risk by making use of property rating approaches. Transforming risk into risk premia for calculating the yield on a risk free basis by partially making use of models of risk and return usually applied in finance. Simulating risk premia (since there is great deal of uncertainty involved in determining these premia) by making use of a statistical method commonly referred to as Monte Carlo Simulation. Using the derived yield's probability distribution in combination with further probability distributions for other valuation input variables (e.g. market rent) to calculate a range of possible outcomes of Market Value as well as a number of statistical measures that can be indicative of the valuer's perceived uncertainty regarding the valuation assignment.FindingsThe empirical part shows that due to data limitations determining idiosyncratic risk premia for property assets is not yet possible. This significantly hampers the development of robust yield pricing models and reinforces the need to create databases including information on both individual property returns and associated building characteristics.Practical implicationsThe paper postulates that there are few (if any) rational reasons for valuers not to use rating and simulation approaches as an indispensable element of the valuation process.Originality/valueA valuation approach that allows simultaneously addressing risk and uncertainty as well as sustainability issues within commercial property valuation practice is proposed.

Sustainable property investment: valuing sustainable buildings through property performance assessment

How can the property and construction industry meet the current and forthcoming challenges posed by sustainable development? The perception of property as a commodity is changing to emphasize building characteristics and performance as major determinants of a property's worth and market value, thereby requiring new ways of assessing worth and value. Commercial property valuation represents a major mechanism that could allow environmental and social considerations to be more closely aligned with economic return. In particular, the rationale and initial considerations are explored for the incorporation of environmental and social issues into valuation theory and practice. A system that allows for the description, measurement and assessment of various aspects of building performance is conceptualized. Possible sustainability key performance indicators are identified and the basic principles for assessing performance along the life cycle of buildings are explained. It is argued that the environmental and building research community has a central role in determining a standardization of terminology and improving the exchange of ideas between financial and environmental research disciplines. Then, the simultaneous consideration of economic, environmental and social issues can provide a more profound knowledge about property characteristics and associated performance. This will create a more robust assessment approach and lead to greater reliability of assessment results. Finally, the opportunities afforded by the synergies between sustainable design and risk management are identified and implications for property risk assessment for lending and insurance purposes are highlighted.

E‐business and its impact on commercial property valuation in private practice firms

AbstractThe use of the Internet has grown significantly in private practice surveying firms in recent years. Initially used as a research and communication device, the industry is finding new ways of using this technology. Property valuers have an important role to play in the development of the profession and in some cases it has been suggested that the Internet and new technology may render obsolete the traditional role of the valuer in private practice. This paper sets out to explore whether the suggestions carry any weight. Copyright © 2001 Henry Stewart Publications

Variance in commercial property valuations for lending purposes: an empirical study

Investigates the extent and possible causes of variance in property investment valuations for commercial lending purposes within the UK. A literature review was undertaken and a questionnaire survey was circulated to individuals involved in the commercial property valuation process in order to gauge professional opinion. The survey revealed that the main cause of variance was found to be a result of the individual valuer’s “behavioural influences”. The survey also found that parties to a valuation instruction widely accept the margin of error principle, the legal manifestation of valuation variance, as a test of negligence.