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Bank of Greece 2nd conference on real estate market
Property valuations during crisis: consequences and risks
Ioannis Ganos MRICSChairman RICS HellasBluehouse Capital
Agenda
1. European Economic Environment
2. Valuation Uncertainty
3. The Red Book - application of a global standard
4. Valuer Registration Scheme
3
Recovery Falters In 2012GDP % YoY 1981-2015
Source: Oxford Economics, October 2011
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
EU World Eurozone
GDP Forecast 2011Europe (tracked on map) 2.6
Eurozone 1.6
European Union 1.7< 0%
0.0 – 0.9%
1.0 – 1.9%
2.0 – 2.9%
> 3.0%
3.0%
1.6%
0.9%
0.7%
0.6%
4.0%
7.5%
4.2%
4.0%
1.2%
3.0%
2.0%
1.7%
1.8%
Source: Oxford Economics
Not tracked
2.3%
Source: Oxford Economics, October 2011
5
GDP Growth Forecast 2011-2013
Most Countries Forecast To See Moderate To Robust Economic Growth
Source: IHS Global Insight, October 2011
Sovereign Debt Remains THE Issue
6
Government Total Debt as % of GDP
Source: Global Insight, October 2011
020406080
100120140160180
Gree
ce
Italy
Irelan
d
Portu
gal
Belg
ium
Germ
any
Fran
ce
Hung
ary
Aust
ria
Spain
Unite
d Ki
ngdo
m
Neth
erlan
ds
Polan
d
Finl
and
Turk
ey
Denm
ark
Switz
erlan
d
Czec
h Re
publ
ic
Norw
ay
Rom
ania
Swed
en
Luxe
mbo
urg
Russ
ia
Chin
a
Unite
d St
ates
%
2011 2015
Borrowing costs
Office Rental Clock Evolution
8
Q3 2011
Q3 2010 Q3 2009
Q3 2008Q3 2007
Source: Jones Lang LaSalle, October 2011
Note: This diagram illustrates where Jones Lang LaSalle estimate each prime office market is within its individual rental cycle as at end of the respective quarter; Markets can move around the clock at different speeds and directions; The diagram is a convenient method of comparing the relative position of markets in their rental cycle; Their position is not necessarily representative of investment or development market prospects; Their position refers to Prime Face Rental Values
Rental GrowthSlowing
RentsFalling
Rental GrowthAccelerating
RentsBottoming Out
AthensBarcelona, LisbonDublin, Edinburgh, MadridAmsterdam, Brussels, Budapest, Rome, BucharestFrankfurt, Istanbul, Kiev, Prague
St. PetersburgCopenhagen, Milan
Berlin, CologneHamburg, Munich
Düsseldorf, Geneva, Lyon,Stockholm, Stuttgart, Warsaw
Helsinki, London West End London City
Moscow, Oslo, Zurich
Paris
Rental GrowthSlowing
RentsFalling
Rental GrowthAccelerating
RentsBottoming Out
Rental GrowthSlowing
RentsFalling
Rental GrowthAccelerating
RentsBottoming Out
Rental GrowthSlowing
RentsFalling
Rental GrowthAccelerating
RentsBottoming Out
AthensAthensBarcelona, LisbonBarcelona, LisbonDublin, Edinburgh, MadridDublin, Edinburgh, MadridAmsterdam, Brussels, Budapest, Amsterdam, Brussels, Budapest, Rome, BucharestRome, BucharestFrankfurt, Istanbul, Kiev, PragueFrankfurt, Istanbul, Kiev, Prague
St. PetersburgSt. PetersburgCopenhagen, MilanCopenhagen, Milan
Berlin, CologneBerlin, CologneHamburg, MunichHamburg, Munich
Düsseldorf, Geneva, Lyon,Stockholm, Stuttgart, Warsaw
Düsseldorf, Geneva, Lyon,Stockholm, Stuttgart, Warsaw
Helsinki, London West End Helsinki, London West End London CityLondon City
Moscow, Oslo, Zurich
ParisParis
European Office Property Clock Q3 2011
9
Rental GrowthSlowing
RentsFalling
Rental GrowthAccelerating
RentsBottoming Out
Source: Jones Lang LaSalle IP, October 2011
AthensBarcelona, Lisbon
Dublin, Edinburgh, MadridAmsterdam, Brussels, Budapest, LuxembourgRome, BucharestFrankfurt, Istanbul, Kiev, Prague
St. PetersburgCopenhagen, Milan
Berlin, Cologne
Hamburg, Munich
Düsseldorf, Geneva, Lyon,Stockholm, Stuttgart, Warsaw
Helsinki, London West End London City
Moscow, Oslo, Zurich
Paris
European Direct Real Estate Investment Volumes
Source: Jones Lang LaSalle; Property Data (UK); Akershus Eiendom (Norway), Athens Economics (Greece), Sadolin & Albaek (Denmark), RCA Analytics, October 2011
Q3 2011 (% change)Q-o-Q Y-o-Y
All Europe +13.0% +26.6%
Eurozone +11.8% +38.3%
CE & Russia +78.2% +152%
55 5366
7260
69 6353
4130 26
17 12 1321 20 24 23
3727 26 2925
0
10
20
30
40
50
60
70
80
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
€ bnQuarterly volumes
Quarterly Average
11
European Average Prime Yields
11
%
Source: Jones Lang LaSalle, Thomson DataStream, October 2011
Note: The Office Yield is a weighted averages for 24 major markets in the region
1.00
2.00
3.00
4.00
5.00
6.00
7.00
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Q32011
UK 5-Year Swap Rate
Office
Euro 5-Year Swap Rate
10-year Bond
BackgroundGrowing concern of financial regulators and stakeholders for better identification and communication of uncertainty in valuations:
1.2008: the Financial Stability Forum (FSF) published an analysis of the causes and weaknesses that had produced the turmoil in financial markets asking for more transparency in valuations.
2.2009: the G20 Declaration on Strengthening the Financial System called for improved standards for valuation uncertainty in the context of fair value accounting.
3.2009: the Basel Committee for banking supervision issued its paper Supervisory Guidance for Assessing Banks’ Financial Instrument Fair Value Practice.
4.2010: the Financial Services Authority (UK) published recommendations for the specific assessment of valuation uncertainty.
Increased role of Valuations
Investment property
IAS 40Assets held for sale
(IFRS 5)
Assets held for sale
(IFRS 5)
Asset/Goodwill ImpairmentTests IAS 36
Financialinstruments
IAS 39, IFRS 7
AcquisitionsIFRS 3
IFRS Conversions
IFRS 1
Property, plant and equipment
Revaluation modelIAS 16
Intangible assetsIAS 38
Nature of Valuation UncertaintyMarket valuations are estimates of the most probable price that
would be paid in a transaction on the valuation date
However, actual prices are subject to:
1. fluctuations caused by market imperfections;2. heterogeneity of the underlying asset (properties);3. different objectives and motivations between the market
players;4. asymmetric information.
Uncertainty is inherent in market valuations
A valuation is not a fact, it is an estimate
What is Market Value???“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 proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion” ,
Source: RICS and IVSC
Market Volatility, Liquidity and ActivityIn turbulence periods, lack of confidence results to price volatility
Valuation uncertainty generally increases due to a lack of market activity, a lack of liquidity or a combination of both
The effect of either reduced liquidity or activity is to reduce the amount of data available to provide empirical support for valuations
This in turn increases the reliance on the extrapolation of evidence from transactions involving similar rather than identical assets or of historic transactions involving identical assets
Thus, the degree of judgment required by the valuer increases thus increasing the level of uncertainty
Measuring UncertaintyA purely numeric illustration will only confirm uncertainty, notexplain it.
Quantifying valuation uncertainty is not simply identifying the worst case scenario.
Valuation uncertainty measurement is not forward looking.
Interdependence and potential netting effects across products could be considered.
Incorporating correlation analysis for significant inputs.
Include a sensitivity analysis supported by strengths and weaknesses commentary.
Valuation Uncertainty vs Market RiskValuation uncertainty relates to the probability that the valuation estimate would differ from the price in an actual transaction on the same terms onthe valuation date.
Market Risk is the loss an asset can face in a given interval of time due to changes in market conditions over that period.
Sources of Valuation Uncertainty
1. Status of the valuer;2. Scope of work;3. Market uncertainty (liquidity and market activity);4. Model uncertainty;5. Input uncertainty (information uncertainty and asymmetry).
The Role of the Independent Valuer
To offer a professional & independent opinion
Independent valuer is:− recognized and relevant professional qualification− recent experience in the location and category of the investment
property being held
Professional standards/ Independent opinion to:− be connected with accounting requirements (see IFRS 13 – Fair
Value Measurements)− meet the client’s expectationsTo meet the auditor’s expectations
Some conclusions
1. Uncertainty is inherent in any valuation because analysis of imperfect markets involves weighing the relevance of the available inputs
2. Valuation users generally accept that valuations involve judgment
3. Adequate disclosure of material uncertainty (by nature and cause)
International Valuation Standards in a Global Market
What’s the story?
1. International Valuation Standards – why do we need them?
2. The Red Book - ethics and applying a global standard
3. Valuer Registration Scheme
Royal Institution of Chartered Surveyors RICS was created in 1868 in the United Kingdom and is the world's leading professional body for qualifications and standards in land, property and construction.
•International headquarters in London, with world regional offices in Brussels, Dubai, Hong Kong, New York and Sydney •Over 100,000 qualified members in over 146 countries •More than 71,100 trainees and students •500 industry research and policy papers published every year
The key roles of RICS are to:•Regulate and promote the profession •Maintain the highest educational and professional standards •Protect clients and consumers through a strict code of ethics •Provide impartial advice, analysis and guidance
• 1980 – 1st edition of the Red Book (RICS Appraisal and Valuation Standards)
• 1996 – Red Book extended to bank valuations• 1996 to 2003 – OMV and MV exist in parallel• 2003 Red Book revised into international & domestic sections
Formally adopts IVSRICS drops OMV in favour of MV
• April 2011 – the 7th EditionPublication of Global Edition as well as UK EditionValuation Standards rather than Practice StatementsClarification of mandatory Standards GN5 ‘Valuation Uncertainty’ has been revised to GN1 ‘Valuation Certainty’
RICS Valuation Standards and Ethics
Valuer Registration Scheme
The Valuer Registration Scheme (VRS) is a voluntary scheme that monitors all registered RICS members.
Its aim is to ensure the quality of valuations, raise the credibility of valuers and provide clients with a clearly identifiable designation for the best-regulated and qualified professionals in the field.
It was launched in mid-September 2011 in continental Europe.
Valuer Registration Scheme
VRS focus and attributes
• Ensures consistent and high-quality valuations by helping members to apply, share and maintain global professional standards.
• International Valuation Standards (IVS) compliant.
• Identifiable in the designation of ‘RICS Registered Valuer’.
Valuer Registration Scheme What is good for clients…
Clients have confidence that they are working with regulated members who
• enforce the RICS Red Book valuation standards
• adhere and commit to openness and transparency
• are experts in their field, delivering credible and high-quality reports
• benefit from additional protection through VRS monitoring.
Valuer Registration Scheme …is good for members
RICS members who register can expect to
• share internationally recognised, approved valuation standards
• receive advice and assistance from RICS regulation and their peers
• benefit from a solid regulatory safeguard
• stand apart from the competition in terms of quality and accountability.
Reflecting Uncertainly in ValuationsPublication of an RICS User Guide
A document prepared for valuers and users if valuations focusing on:• General understanding of the concept of uncertainty• Understanding risk and uncertainty through worked examples• Methods by which uncertainty in valuations may be identified• Communicate uncertainly to clients with clarity
Professional Indemnity InsuranceRICS Guidance outside of the UK
A document is under preparation by RICS to advise on:• Minimum standards for adequacy and appropriateness of PI cover• Further recommendations for PI policies
RICS is also working on the following:
• Providing a network of broker contacts for regions outside the UK• Identifying a global provider of PII delivering an acceptable product for regulatory
purposes.
Thank you
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