Real Estate Valuation An International Perspective Nick French Professor in Real Estate Department of Real Estate & Construction Oxford Brookes University Email: nick.french@brookes.ac.uk
Agenda ¨ What is Real Property? ¨ Adam Smith and David Ricardo – Rent Theory ¨ What is Value? ¨ How does it differ to Price and Worth? ¨ Value and Worth - Overpricing and underpricing in a difficult market ¨ International drivers that impact value
What is Real Property? ¨ Is it bricks and tiles? ¨ Is it steel and glass? ¨ Is it land and agriculture? ¨ Is it roads and infrastructure? It is all those things. Real Property is Land and improvements made by human endeavour. It is finite and it a factor of production. It is Real Estate.
Adam Smith & David Ricardo ¨ Ricardo was a contemporary (ish) of Adam Smith. Their lives over-lapped albeit they never met. ¨ He is considered to be in the same group of British Classical Economists. ¨ Evidently, Ricardo became interested in economics after reading Adam Smith's The Wealth of Nations in 1799 (Smith died in 1790). So there is a direct link with Smith
Ricardian Rent Theory ¨ Land and property are factors of production. ¨ As with any other asset, the value of the land flows from the use to which it is put, and that in turn, is dependent upon the demand (and supply) for the product that is produced. ¨ If there is a high demand for the product (at a fixed level of supply), the price will increase and the economic rent for the land/property will increase accordingly.
Ricardian Rent Theory ¨ This is the underlying paradigm of Ricardian rent theory where the supply of land is fixed and a single good is produced. ¨ In such a case the rent of land is wholly an economic rent; ‘ the rent of land is high because the price of corn is high ’ ¨ Market Price (determined by supply and demand) ¨ On the Principles of Political Economy and Taxation (1817) – David Ricardo
Price, Value and Worth ¨ What is Price ? ¨ What Is Worth ? ¨ What is Value ?
Price and Worth Market Analysis 10 9 8 7 6 5 4 3 2 1 0 $0 $3 $6 $9 $12 $15 $18 Bids
Price, Value and Worth ¨ Price is the observable exchange point in the marketplace (Capital Value or Rent) ¨ Value is an estimate of price (Capital Value or Rent) ¨ Worth is an individual’s assessment of their maximum bid In terms of economics worth can be considered as value in use , whereas price or market value can be considered as value in exchange. (A concept that goes back to Aristotle - a shoe is used for wear, and is used for exchange; both are uses of the shoe .... the same may be said of all possessions ... )
International Valuation Standards (2011) ¨ International Valuation Standards Council (IVSC) ¨ New Standards (2011) ¨ The IVSC Standards are available to download at www.ivsc.org
Market Value (Basis) Market Value is the estimated amount for which an asset or liability should exchange on the date of appraisal 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. IVSC, Valuation Standards 2011
Market Value (Price Definition) Price is the amount for which an asset or liability did exchange on the date of sale 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.
International Pricing ¨ “Mark to market” ¨ Valuation drivers ¨ Safe Haven – different drivers ¨ Global Market ¨ A world without transactions ¨ Valuation Sentiment ¨ Uncertainty – pricing cash flows
Conclusions ¨ Valuation is an estimate of price ¨ In a world with less comparison, Valuers will need to understand markets more ¨ A global market needs global standards ¨ Assumptions of perpetuity will be challenged ¨ The valuer needs to question the future ¨ Market sentiment is replacing market evidence
Real Estate Valuation An International Perspective Nick French Professor in Real Estate Department of Real Estate & Construction Oxford Brookes University Email: nick.french@brookes.ac.uk
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