Time for a new era in property valuation

How should real estate be valued in challenging times? It’s a question that always arises during market volatility, and which in the last year has resurfaced for the first time since UK values fell 44% over six months during the financial crisis. Sharp falls in the value of retail property have triggered the debate this time around, with yawning gaps between the net asset values of some of the UK’s biggest REITs and the price those companies trade at on the stock market. This has prompted a further debate over how UK real estate companies are valued, with most listed companies valued according to a multiple of earnings, and only property companies according to a valuation by a surveyor, according to rules set by the RICS Red Book. Here I want to examine the challenges facing UK property valuation before outlining how I, and the team at the IPSX exchange, believe the system can be simplified through a new transparent way to invest in individual properties rather than property companies. Finding solutions First, why do some listed property companies trade at large premiums and others at wide discounts to their supposed net asset value? One reason is the management team, which can add to or substantially detract from the value of a property company, depending on their reputation and performance. The other is that businesses now judged as ‘operational’, often in areas seen as less vulnerable to economic shocks such as student accommodation, self storage or healthcare, are now being valued just as much on the reliability of their income as the value of the assets they own. Valuation of the fast growing build-to-rent asset class is also moving in this direction – and away from the traditional vacant possession value – to reflect the quality of the income stream, but also the standard of management, as is the case in US multi-family real estate. But in this era of data and transparency, shouldn’t we be going further with real estate valuation? I would argue that investors should have access to the valuation reports detailing the workings behind calculations and explaining the quality of the tenants’ income, including break clauses or anything else which might be a cause for concern. Full details of future cash flows would allow investors to work out for themselves the rate of returns they can expect from their investment, rather than just relying on one firm of chartered surveyors’ own (admittedly expert) view of that property’s prospects. How helpful it would be, for example, for investors to fully understand the prospects of a tenant like Thomas Cook before parting with their money to buy into a property company which is its landlord. Institutional investors, at the same time, are still attracted to the 5%-plus yields offered by most UK real estate compared with government bonds yielding sub-1%, or even negative, rates. These investors need the yield provided by real estate to match their long-term pensions and insurance liabilities, but are also reluctant to buy direct real estate due to fears over its illiquidity. So in an era of big data, when we can forecast everything from population growth to flood risk to rising temperatures, what is the answer for valuation and the wider investment community? Greater choice I believe specialisation is the answer. Not just sector specialisation, but specialisation at the level which allows investors to buy shares in individual assets of the type that will be listing on IPSX, the world’s first dedicated real estate stock exchange. Our team will be providing investors with more regulatory protection, more data and transparency, daily pricing and liquidity and low correlation – real estate returns from an asset that investors have chosen to buy into without the drag caused by others in a company’s portfolio. There is an exciting new future for valuers in this changing world – but investors will demand to see more of their detailed calculations as they have a wider choice of how to buy real estate. As more investors buy into individual, listed real estate assets, more transparency will be needed from valuers than ever before. The best valuers will thrive in this arena, helping to give property investment overall a whole new, fresh lease of life. Roger Clarke is head of capital markets at IPSX