VALUATION ONE 2010

Valuation One 2010

Valuation One 2010

INTRODUCTION

It has been suggested that the UK property market has lagged behind North America in adopting innovative analytic models and financial vehicles. In the property market boom in the mid to late 1980s, innovative development finance and funding techniques were adopted in UK property markets (and, in particular, to finance office development in central London). The subsequent property market slump and general recession led to retrenchment, with more traditional techniques and valuation models dominating the market. This has been seen as a constraint on developers, landlords and occupiers, particularly in the light of the demand for more flexible business practices and the intense competition between countries and cites for market share.

Over the last few years there has been growing evidence of more innovative approaches in property markets. Debt securitisation and asset-backed securitisation has become more common, the £1.5bn Broadgate securitisation providing one obvious, major example. The Private Finance Initiative has led to consideration of innovative funding techniques and new ways of procuring space and services. The domination of the long UK institutional lease has been eroded, while new forms of supply - the rise of the serviced office sub-sector, for example - and new forms of paying for space have evolved, such as the consideration of entry fees at Bluewater and turnover rents elsewhere as a complement or alternative to traditional retail rents. There has been an active debate on the creation of securitised investment vehicles, despite Treasury reluctance to countenance tax transparency, and much interest in derivatives, notably swaps, and option pricing techniques.

Nonetheless, as research by the University of Reading and others has demonstrated, there is much resistance to innovation within the property industry. Research on the valuation of serviced offices, for example, reveals that traditional valuation techniques remain dominant and that those techniques act as a constraint to supply.

In particular, loan valuations, based on vacant possession value, discount the potential additional income from the business. Similarly, research strongly suggests that traditional valuation methodology understates the investment worth of shorter or non-standard leases when compared to simulation-based cashflows or option pricing models. Since asset valuation is fundamental to the development of active securitised debt and derivative markets, this presents a constraint to innovation.

This report presents findings drawn from a research project commissioned by the Corporation of London. The broad aim of the project was to analyse the potential for, and the impact of, innovations in the financing, funding and procurement of property and to spread knowledge of innovative techniques to relevant parties with interests in the City of London.

3 Specific objectives arising from that aim were to:

· critically review existing models of finance, funding and appraisal in the property industry in the light of changing business requirements;

· survey recent innovative financial products, vehicles and funding techniques in commercial property markets;

· examine case studies of innovative finance and procurement methods to illustrate the potential (and pitfalls) of the new techniques;

· draw lessons from developments in the US commercial real estate markets;

· consider likely future trends ...