Bank of Greece 2 conference on real estate market Property ... · 2nd conference on real estate market Property valuations during crisis: consequences and risks ... Dubai, Hong Kong,

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


RentsFalling


RentsBottoming Out


RentsFalling


RentsBottoming Out


RentsFalling


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



Helsinki, London West End Helsinki, London West End London CityLondon City


ParisParis

European Office Property Clock Q3 2011

9


RentsFalling


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


Helsinki, London West End London City


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

Documents

Bank of Greece 2 conference on real estate market Property ... · 2nd conference on real estate market Property valuations during crisis: consequences and risks ... Dubai, Hong Kong,