Jun 12, 2009

Back to the Future

Michael J. Fox driving his DeLorean back and forth in the past and in the future, riding his skateboard, listening to Huey Lewis and the News singing the “Power of Love” was one of my favorite movies. I spent an awful lot of time looking at the VHS video (for those who are younger than 25, VHS tapes were big black boxes with movies of bad quality which you could watch on TV, and TVs at that time were also large boxes with a small screens).

DeLoreans (which are neither built by GM, nor by Chrysler) cost around 20,000 to 30,000 $ a piece today. Why is that relevant to real estate you might ask? That is because DeLorean cars might come as out-of-pocket expenses on next year’s valuation invoices following the RICS new recommendation issued on May 29th 2009. It reads as follows:

“There are times when markets can experience rapidly changing pricing of assets, with the consequence that a valuation can become out of date very rapidly. It is during periods such as this that a client, particularly a lender conducting a loan security review, may seek additional advice from the valuer. This is likely to be not only focus upon the Market Value today, but also what it might be in the near future.” (Full pdf can be downloaded here).

The RICS press release states that: “It (the valuer) focuses on issues to be considered and reported upon in looking at the future prospects for a property, an area where valuers have significant skills and insights.” (Full press release available here).

I did an interesting test while researching in order to write this piece. I looked at past RICS publication to get a grab of the insight of surveyors. Here are some extracts of past RICS commercial market surveys (those relate to the UK Market, and sources can be found here):

• Q107 - EPRA UK at 1600: Surveyor optimism regarding the outlook for rents was upbeat overall in Q1
• Q207 - EPRA UK at 1330: Surveyors’ rental expectations rose at the fastest pace in close to 7 years
• Q307 - EPRA UK at 1120: Surveyors’ rental expectations rose at a slower pace than in Q2 which marked a near 7 year high
• Q407 - EPRA UK at 860: Surveyors’ rental expectations stagnated in the fourth quarter
• Q108 - EPRA UK at 840: Surveyors’ rental expectations turned negative in the first quarter for the first time since 2004 Q1

Based on the above, it does not really seem that the “insight” of surveyors was that different from the one of anybody else when it comes to predicting future trends. Do not get me wrong. I am not suggesting anything about the skills and quality of RICS surveyors as individuals. I am just highlighting that they are like any other human being when it comes to predicting the future. Taken as a group they are in that respect, like any other group, clueless, and influenced by the general environment. They tend to be over-positive in bull market, in denial at the beginning of a bear market, puzzled between hope and despair in bear markets. They do not drive DeLorean.

It is important not to mix up the different roles in the real estate investment chain. Valuer already had a tough job, being caught between the rock and the hard place (the borrower and the lender) when it comes to determine the Market Value of a real estate asset. It requires an enormous amount of skills and experience in order to be able to determine the Market Value (as defined by the red book) of a property at a given date, based on existing and factual tangible information. It is not the valuer role to “take a view”, or form an opinion on future markets This would be the role of the management of a real estate company. We do have to form our own opinion on the market development, and make decision consistent with theses views (i.e. either to buy or to sell, to provide more or less tenant incentives...). The same hold true for lenders.

We are with no doubt going into extraordinary times. In those times you want to make sure that each role in the investment chain is clear. I believe the new RICS recommendation from that perspective is missing the point. It blurs the role of the valuer rather than making it clearer. Its role is to provide an indication of value at a given date, and not to speculate about the future. Moreover the RICS recommendation seems to suggests that some investors or lenders cannot form there own opinion of market movement. As an investor you'd better rely on your own judgment to determine the value of an asset (or the loan you want to grant).

Our valuer will probably not need a DeLorean, as we will ask him to focus on providing alstria with his independent view on the market value of the portfolio at year end. I love discussing about the market with the team which values alstria’s portfolio. We have positive exchanges on the factual experiences we share in the market, and we can reasonably argue or debate around hard evidence. It is an open discussion between real estate professionals. I would hate to have to argue with them on whether or not tomorrow is going to be a better day. Since when can weathermen predict the weather? Let alone the future! (Marty Mac Fly, Back to the future)


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