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This paper addresses property valuation methodology and discusses issues connected to the feasibility of implementing a Basel III instigated prudent valuation regime to replace or supplement the existing approaches of Market Value and Mortgage Lending Value used for bank lending and financial regulation purposes. The EU are considering implementing Prudent Value within Europe but the implications of this discussion may be felt globally if other jurisdictions seek to implement this aspect of the Basel Accord.\ud The questions to be addressed are:\ud • What are the different definitions of property valuation, what do they actually mean, and can the definitions be transposed into a meaningful approach that creates the correct basis for lending decisions and monitoring of those decisions?\ud • What are the precise details of any methods that can be developed to deliver these valuations and do valuers have the ability and the resources to deliver these valuations?\ud • What are the alternatives and what infrastructure needs to be developed to enable valuers to deliver a prudent valuation regime?\ud This paper is based on evidence presented to the EU which was developed with the co-operation of the three major valuation institutions concerned with valuations in Europe; the International Valuation Standards Council (IVSC), The European Group of Valuers (TEGOVA) and the Royal Institution of Chartered Surveyors (RICS) (Crosby and Hordijk, 2021)

Data on land values is important for market analysis and policy making. This research paper reviews sources of land prices and land value estimates in the UK, as well as recent attempts to create land price series in the US. It finds that there is little data available on land prices or values, particularly for commercial land uses.\ud A residual valuation model is used to estimate land values for hypothetical schemes in selected cities and regions. The residual land values are not market prices and do not capture the option value associated with real sites, but they give an indication of value for immediate development before planning obligations. Residual land values are analysed to determine whether changes in the viability of different land uses are driven primarily by costs, rents or pricing. \ud Land uses that have been modelled include residential apartments, offices, high street shops, industrial units and retail warehouses. Rents and yields were sourced from CBRE, apartment prices from the Office for National Statistics and construction costs from the Building Cost Information Service, with other inputs detailed in the report. Quarterly estimates of residual land values were produced from 1995 to 2016 for apartments and from 1997 to mid-2017 for the commercial land uses.\ud As expected, there is a major North/South divide across the country for some land uses analysed and, in some parts of the country for some uses, development would not be viable without intervention. Industrial schemes in the Midlands and North are a good example, but negative values also occur in some locations for apartments at the beginning and end of the analysis period. \ud Movements in residual land values through time are mainly driven by the largest input into the valuation model, development value. One reason for this is the lack of relative volatility in the construction costs estimates used for this analysis. \ud As a proportion of development value, residual land values have remained fairly stable across the different property types over the time period studied. The exception is during the 2007/2008 Financial Crisis when land values dropped to lower proportions across all the sectors. This indicates greater falls in land values than in the value of the associated developed asset, reinforcing the gearing effect and greater volatility of land values.\ud Land value forms the highest proportion of development value for high street retail and retail warehouses in relation to other uses. For most land uses, land values are also a higher share of total value in London relative to other regions and locations.\ud Where possible, the residual land values were benchmarked against existing land value data and indices. The results are variable across the sectors. For example, office residual land values in London increased at a greater rate than the Savills London Office Development Land Value Index in the aftermath of the Financial Crisis.\ud This research adds to existing knowledge of land values. It also increases the transparency of land\ud markets and could assist policy-making in relation to land value capture. It establishes a framework for continued recording of land value trends into the future, setting out the limitations of the approach. Finally, it invites discussion on the suitability of this framework for the creation of a development land value series for the UK.

In England, appraisals of the financial viability of development schemes have become an integral part of planning policy-making, initially in determining the amount of planning obligations that might be obtained via legal agreements (known as Section 106 agreements) and latterly as a basis for establishing charging schedules for the Community Infrastructure Levy (CIL). Local planning authorities set these policies on an area-wide basis but ultimately development proposals require consent on a site-by-site basis. It is at this site-specific level that issues of viability are hotly contested. \ud This paper examines case documents, proofs of evidence and decisions from a sample of planning disputes in order to address major issues within development viability, the application of the models and the distribution of the development gain between the developer, landowner and community. The results have specific application to viability assessment in England and should impact on future policy and practice guidance in this field. They also have relevance to other countries that incorporate assessments of economic viability in their planning systems.

Purpose – UK Government policy to address perceived market failure in commercial property leasing has largely been pursued through industry self-regulation. Yet, it is proving difficult to assess whether self-regulation on leasing has been a “success”, or even to determine how to evaluate this. The purpose of this paper is to provide a framework for this and a clearer understanding of self-regulation in commercial leasing. \ud \ud Design/methodology/approach – A literature review suggests key criteria to explain the (in)effectiveness of self-regulation. UK lease codes are analysed in the light of this literature, drawing on previous research carried out by the authors on the operation of these codes. \ud \ud Findings – Lease codes appear to be failing as an effective system of self-regulation. While there are influential market actors championing them, the fragmentation of the leasing process lessens this influence. The structures are not there to ensure implementation, monitor compliance and record views of affected stakeholders. \ud \ud Research limitations/implications – This work adds to the literature on self-regulation in general, and provides an insight into its operation in a previously unexplored industry. Research is needed into the experience of other countries in regulating the property industry by voluntary means. \ud \ud Social implications – There are institutional limitations to self-regulation within the property industry. This has implications for policy makers in considering the advantages and limitation of using a voluntary solution to achieve policy aims within the commercial leasing market. \ud \ud Originality/value – This paper provides a first step in considering the lease codes in the wider context of industry self-regulation and is relevant to policy makers and industry bodies.

In the context of the financial crash and the commercial property market downturn, this paper examines the basis of valuation used in the UK commercial property lending process. Post-crisis there is discussion of countercyclical measures including the monitoring of asset prices; however there is no consideration of a different approach to property valuation. This paper questions this omission, given the role that valuations play in the bank regulatory process. The different bases of valuation available to lenders within International Valuation Standards are identified as Market Value (MV), Mortgage Lending Value (MLV) and Investment Value (IV), with MV being the most used in the UK. Using the different bases in the period before the financial crisis, the UK property market is modelled at a national office, retail and industrial/warehouse sector level to determine the performance of each alternative valuation basis within the context of counter-cyclical pressures on lending. Both MLV and IV would have produced lower valuations and could have provided lenders with tools for more informed and prudent lending. The paper concludes by recognising some of the practical issues involved in adopting the different bases for the bank lending role but recommends a change to IV.

The terms of a commercial property lease covers aspects such as rent, alterations to premises and the ability to leave; consequently they have a significant impact on cash flow and the ability of a business to develop. In contrast to the heavily-legislated residential sector, commercial landlords and tenants in the UK are largely free to negotiate the terms of their contract. Yet, since the property crash of 1989/90, successive governments have taken an interest in commercial leasing; in particular there is a desire to see landlords being more flexible. UK Government policy in this area has been pursued through industry self-regulation rather than legislation; since 1995 there have been three industry codes of practice on leasing. These codes are sanctioned by government and monitored by them. Yet, 15 years after the first code was launched, many in the industry see the whole code concept as ineffective and unlikely to ever achieve changes to certain aspects of landlord behaviour. \ud \ud This paper is the first step in considering the lease codes in the wider context of industry self-regulation. The aim of the paper is twofold: First a framework is created using the literature on industry self-regulation from various countries and industries which suggests key criteria to explain the effectiveness (or ineffectiveness) of self-regulation. This is then applied to the UK lease codes based on research carried out by the authors for the UK Government to monitor the success of all three codes. The outcome is a clearer understanding of the possibilities and limitations of using a voluntary solution to achieve policy aims within the property industry.\ud

The aim of this paper is to critically examine the application of development appraisal to viability assessment in the planning system. This evaluation is of development appraisal models in general and also their use in particular applications associated with estimating planning obligation capacity. The paper is organised into four themes:\ud \ud · The context and conceptual basis for development viability appraisal\ud · A review of development viability appraisal methods\ud · A discussion of selected key inputs into a development viability appraisal\ud · A discussion of the applications of development viability appraisals in the planning system \ud \ud It is assumed that readers are familiar with the basic models and information needs of development viability appraisal rather than at the cutting edge of practice and/or academe\ud

In late 2005, a number of German open ended funds suffered significant withdrawals by unit holders. The crisis was precipitated by a long term bear market in German property investment and the fact that these funds offered short term liquidity to unit holders but had low levels of liquidity in the fund. A more controversial suggestion was that the crisis was exacerbated by a perception that the valuations of the fund were too infrequent and inaccurate. As units are priced by reference to these valuations with no secondary market, the valuation process is central to the process. There is no direct evidence that these funds were over-valued but there is circumstantial evidence and this paper examines the indirect evidence of the process to see whether the hypothesis that valuation is an issue for the German funds holds any credibility. It also discusses whether there is a wider issue for other funds of this nature or whether it is a parochial problem confined to Germany. The conclusions are that there is reason to believe that German valuation processes make over-valuation in a recession more likely than in other countries and that more direct research into the German valuation system is required to identify the issues which need to be addressed to make the valuation system more trusted.\ud

This paper addresses the commercial leases policy issue of how to deal with small business tenants. The UK has adopted a voluntary solution to commercial lease reform by using Codes of Practice which is in contrast to the legislative approach adopted by Australia to attempt to solve its perceived problems with small business retail tenancies. The major aim of the research was to examine the perceptions of the effectiveness of the legislation in Australia and discuss any implications for the UK policy debate but the results of the research also raise questions for the Australian regime. \ud The research used a combination of literature and legislation review and a semi structured interview survey to investigate the policy aims and objectives of Australian Federal and State Governments, identify the nature and scope of the Australian legislation and examine perceptions of effectiveness of the legislation in informing small business tenants. The situation is complicated in Australia due to leases being a State rather than Federal responsibility therefore the main fieldwork was carried out in one case study State, Victoria. \ud \ud The paper concludes that some aspects of the Australian system can inform the UK policy debate including mandatory information provision at the commencement of negotiations and the use of lease registrars/commissioners. However, there are a number of issues that the Australian legislation does not appear to have successfully addressed including the difficulties of legislating across partial segments of the commercial property market and the collection of data for enforcement purposes. \ud

Depreciation is a key element of understanding the returns from and price of commercial real estate. Understanding its impact is important for asset allocation models and asset management decisions. It is a key input into well-constructed pricing models and its impact on indices of commercial real estate prices needs to be recognised. \ud There have been a number of previous studies of the impact of depreciation on real estate, particularly in the UK. Law (2004) analysed all of these studies and found that the seemingly consistent results were an illusion as they all used a variety of measurement methods and data. In addition, none of these studies examined impact on total returns; they examined either rental value depreciation alone or rental and capital value depreciation. \ud \ud This study seeks to rectify this omission, adopting the best practice measurement framework set out by Law (2004). Using individual property data from the UK Investment Property Databank for the 10-year period between 1994 and 2003, rental and capital depreciation, capital expenditure rates, and total return series for the data sample and for a benchmark are calculated for 10 market segments. The results are complicated by the period of analysis which started in the aftermath of the major UK real estate recession of the early 1990s, but they give important insights into the impact of depreciation in different segments of the UK real estate investment market. \ud \ud

Many businesses in the UK occupy premises on fixed term leases, which usually run for several years. During this time property requirements can change. This research critically examines the three main mechanisms by which tenants can bring their leases to an end; breaks, assignment and subletting. We examine the legal rules governing these devices and undertake an analysis of lease data and surveys. Break clauses are providing a useful exit mechanism for many tenants, but they cannot give the more general flexibility of assignment and subletting. However, change is necessary to ensure that these latter provisions provide real flexibility for tenants. \ud

This paper addresses the commercial leases policy issue of how to deal with small business tenants. The UK has adopted a voluntary solution to commercial lease reform by using Codes of Practice which is in contrast to the legislative approach adopted by Australia to attempt to solve its perceived problems with small business retail tenancies. The aim of the research was to examine the perceptions of the effectiveness of the legislation in Australia and discuss any implications for the UK policy debate. The research used a combination of literature and legislation review and a semi structured interview survey to investigate the policy aims and objectives of Australian Federal and State Governments, identify the nature and scope of the Australian legislation and examine perceptions of effectiveness of the legislation in informing small business tenants. The situation is complicated in Australia due to leases being a State rather than Federal responsibility therefore the main fieldwork was carried out in one case study State, Victoria. The paper concludes that some aspects of the Australian system can inform the UK policy debate including mandatory information provision at the commencement of negotiations and the use of lease registrars/commissioners. However, there are a number of issues that the Australian legislation does not appear to have successfully addressed including the difficulties of legislating across partial segments of the commercial property market and the collection of data for enforcement purposes.\ud

In negotiating commercial leases, many landlords and tenants employ property agents (brokers) to act on their behalf; typically these people are chartered surveyors. The aim of this paper is to explore the role that these brokers play in the shaping of commercial leases in the context of the current debate in the UK on upward only rent reviews. This role can be described using agency theory and the theories of professionalism. These provide expectations of behaviour which show inherent tensions between the role of agent and professional, particularly regarding the use of knowledge, autonomy and the obligation to the public interest. The parties to eleven recent lease transactions were interviewed to see if the brokers conformed to the expectations of agency theory or professionalism. Brokers that acted for industrial and office tenants behaved as professionals in using their expertise to determine lease structures. However, those acting for landlords and retail tenants simply followed instructions and behaved as conduits for their clients, a role more usually associated with that of an agent within the principal-agent relationship. None of the landlords’ brokers saw themselves as having responsibilities beyond their clients and so they were not promoting the discussion of alternatives to the UORR. The evidence from these case studies suggests that agents are not professionals; to behave entirely as an agent is to contradict the essential characteristics of a professional. While brokers cannot be held entirely responsible for the lack of movement on the UORR, by adopting predominantly agent roles then they must take some of the blame. However, behind this may be a much larger issue that needs to be explored; the institutional pressures that lead to professionals behaving in this way. \ud \ud

This paper sets out the findings relating to small business tenants of a major UK Government funded study into the commercial and industrial property landlord and tenant relationship. The UK Government is concerned that small business tenants do not appreciate many of the implications of signing leases, which in the UK are generally longer than in most other countries of the world. The objectives of the paper are to identify the characteristics of leases in the UK and any differences between those signed by small, medium and larger companies. It also examines the negotiation process and identifies whether small business tenant negotiations exhibit different characteristics. The findings are that small business tenants occupy on different terms to larger tenants including shorter terms and that the negotiation process is also different. Many small business tenants are unrepresented at the commercial stage of negotiations and take the first terms on offer. They are largely unaware of attempts to make them more informed by voluntary industry Codes of Practice. This can lead to small business tenants being unaware of the implications of certain terms within leases, hence the continuing Government concern over the issue. \ud \ud

The variety and quality of the tenant mix within a shopping centre is a key concern in shopping centre management. Tenant mix determines the extent of externalities between outlets in the centre, helps establish the image of the centre and, as a result, determines the attractiveness of the centre for consumers. This then translates into sales and rents. However, the management of tenant mix has largely been based on perceived “optimum” arrangements and industry rules of thumb. This paper attempts to model the impact of tenant mix on the rent paid by retailers in larger UK shopping centres and, hence, the returns made by shopping centre landlords. It extends work on shopping centre rent determination (see Working Paper 10/03) utilising a database of 148 regional shopping centres in the UK, with detailed data for over 1900 tenants. Econometric models test the relationship between rental levels and the levels of retail concentration and diversity, while controlling for a range of continuous and qualitative characteristics of each tenant, each retail product, and each shopping centre. Factor analysis is then used to extract the core retail and service categories from the tenant lists of the 148 shopping centres. The factor scores from these core retailer factors are then tested against rent payable. The results from the empirical analysis allow us to generate some clear analytical and empirical implications for optimal retail management.

A significant part of bank lending in the UK is secured on commercial property and valuations play an important part in this process. They are an integral part of risk management within the banking sector. It is therefore important that valuations are independent and objective and are used properly to ensure that secured lending is soundly based from the perspective of both lender and borrower. The purpose of this research is to examine objectivity and transparency in the valuation process for bank lending and to identify any influences which may undermine the process. A detailed analysis of 31 valuation negligence cases has been followed by two focus groups of lenders and valuers and also questionnaire surveys of commercial lenders and valuers. Many stakeholders exist, for example lenders, borrowers and brokers, who are able to influence the process in various ways. The strongest evidence of overt influence in the process comes from the method of valuer selection with borrowers and brokers seen to be heavily involved. There is some also some evidence of influence during the draft valuation process. A significant minority of valuers feel that inappropriate pressure is applied by borrowers and brokers yet there is no apparent part of the process that leads to this. The panel system employed by lenders is found to be a significant part of the system and merits further examination. The pressure felt by valuers needs more investigation along with the question of if and how the process could dispel such feelings. This is seen as particularly important in the context of bank regulation. \ud

This paper draws from a wider research programme in the UK undertaken for the Investment Property Forum examining liquidity in commercial property. One aspect of liquidity is the process by which transactions occur including both how properties are selected for sale and the time taken to transact. The paper analyses data from three organisations; a property company, a major financial institution and an asset management company, formally a major public sector pension fund. The data covers three market states and includes sales completed in 1995, 2000 and 2002 in the UK. The research interviewed key individuals within the three organisations to identify any common patterns of activity within the sale process and also identified the timing of 187 actual transactions from inception of the sale to completion. The research developed a taxonomy of the transaction process. Interviews with vendors indicated that decisions to sell were a product of a combination of portfolio, specific property and market based issues. Properties were generally not kept in a “readiness for sale” state. The average time from first decision to sell the actual property to completion had a mean time of 298 days and a median of 190 days. It is concluded that this study may underestimate the true length of the time to transact for two reasons. Firstly, the pre-marketing period is rarely recorded in transaction files. Secondly, and more fundamentally, studies of sold properties may contain selection bias. The research indicated that vendors tended to sell properties which it was perceived could be sold at a ‘fair’ price in a reasonable period of time. \ud

Carsberg (2002) suggested that the periodic valuation accuracy studies undertaken by, amongst others, IPD/Drivers Jonas (2003) should be undertaken every year and be sponsored by the RICS, which acts as the self-regulating body for valuations in the UK. This paper does not address the wider issues concerning the nature of properties which are sold and whether the sale prices are influenced by prior valuations, but considers solely the technical issues \ud concerning the timing of the valuation and sales data. \ud This study uses valuations and sales data from the Investment Property Databank UK Monthly Index to attempt to identify the date that sale data is divulged to valuers. This information will inform accuracy studies that use a cut-off date as to the closeness of valuations to sales completion date as a yardstick for excluding data from the analysis. It will also, assuming valuers are informed quickly of any agreed sales, help to determine the actual \ud sale agreed date rather than the completion date, which includes a period of due diligence between when the sale is agreed and its completion. Valuations should be updated to this date, rather than the formal completion date, if a reliable measure of valuation accuracy is to be determined. \ud An accuracy study is then undertaken using a variety of updating periods and the differences between the results are examined. The paper concludes that the sale only becomes known to valuers in the month prior to the sale taking place and that this assumes either that sales due \ud diligence procedures are shortening or valuers are not told quickly of agreed sale prices. Studies that adopt a four-month cut-off date for any valuations compared to sales completion dates are over cautious, and this could be reduced to two months without compromising the data. \ud \ud

In enclosed shopping centres, stores benefit from the positive externalities of other stores in the centre. Some stores provide greater benefits to their neighbours than others – for example anchor tenants and brand leading stores. In managing shopping centres, these positive externalities might be captured through rental variations. \ud This paper explores the determinants of rent – including externalities – for UK regional shopping centres. Two linked databases were utilised in the research. One contains characteristics of 148 shopping centres; the other has some 1,930 individual tenant records including rent level. These data were analysed to provide information on the characteristics of centres and retailers that help determine rent. Factors influencing tenant rents include market potential factors derived from urban and regional economic theory and shopping centre characteristics identified in prior retail research. The model also includes variables that proxy for the interaction between tenants and the impact of positive in-centre externalities. We find that store size is significantly and negatively related to tenant with both anchor and other larger tenants, perhaps as a result of the positive effects generated by their presence, paying relatively lower rents while smaller stores, benefiting from the generation of demand, pay relatively higher rents. Brand leader tenants pay lower rents than other tenants within individual retail categories.

There is a substantial literature which suggests that appraisals are smoothed and lag the true level of prices. This study combines a qualitative interview survey of the leading fund manager/owners in the UK and their appraisers with a empirical study of the number of appraisals which change each month within the IPD Monthly Index. The paper concentrates on how the appraisal process operates for commercial real estate performance measurement purposes. The survey interviews suggest that periodic appraisal services are consolidating in fewer firms and, within these major firms, appraisers adopt different approaches to changing appraisals on a period by period basis, with some wanting hard transaction evidence while others act on ‘softer’ signals. The survey also indicates a seasonal effect with greater effort and information being applied to annual and quarterly appraisals than monthly. The analysis of the appraisals within the IPD Monthly Index confirms this effect with around 5% more appraisals being moved at each quarter day than the other months. More November appraisals change than expected and this suggests that the increased information flows for the December end year appraisals are flowing through into earlier appraisals, especially as client/appraiser draft appraisal meetings for the December appraisals, a regular occurrence in the UK, can occur in November. January illustrates significantly less activity than other months, a seasonal effect after the exertions of the December appraisals.

This paper is the second of two papers which aim to examine the major legal liability implications of changes to the commercial property loan valuation process caused by the recession in the UK property market and to make recommendations to valuers and their professional institutions to improve the quality of the process and the result. The objectives of this paper are to address a number of the practical implications of changes to the loan valuation process within the context of legal liability. The results of an interview survey of lenders and valuers are reported and analysed. The survey examined the loan valuation process including the selection and instruction of valuers, bases of valuation and valuation reporting. In the selection and instruction process, the findings of the survey reveal two potential problems within the valuer/lender relationship. First, valuers still occasionally accept instructions from borrowers and this could lead to a conflict of interest as lenders may rely on the survey. Second, the occasional lack of formal instructions prior to the delivery of reports casts doubt on the valuer’s ability to correctly identify the needs of clients. Regarding the basis of valuation, it was found that valuers are providing valuations on bases which they do not think are appropriate. Valuers may be legally liable if they do not inform clients of their reservations and this situation must be urgently addressed. The survey also confirms previous research that valuation reports are considered to be light on contextual information concerning markets. The paper concludes by making a number of specific recommendations concerning possible improvements to the commercial property loan valuation process.

This paper examines the phenomenon of cross-border property lending and examines a number of issues regarding lending procedures and decision making processes in the context of the relationship between lender and professional advisor. It commences by placing these procedures and processes in the context of the development of cross border European property investment and finance. The UK has been a popular destination for overseas investors and lenders over the last decade and is therefore used as a case study to examine the additional institutional risk that overseas lenders may face when operating outside of their own country and obtaining advice from home professionals. The UK market was the subject of a boom period during the late 1980s, followed by a recession in the early 1990s. The losses triggered a number of professional negligence actions by lenders against valuers. These include a number of overseas lenders mainly from Europe and these cases have been examined for any particular features which, coupled with other data gained from overseas lenders as part of an interview survey, could be used to isolate any significant problems for European lenders in overseas markets. The research identified a lack of clarity in roles and relationships between lender and advisor, difficulties in communications both internally and between overseas branches and headquarters and failures in provision and interpretation of advice. The paper concludes by identifying the issues which may need to be addressed generally by lenders and their advisors, when the lenders are operating in overseas markets.\ud

This paper is the first of two which aim to examine the major legal liability implications of changes to the commercial property loan valuation process caused by the recession in the UK property market and to make recommendations to valuers and their professional institutions to improve the quality of the process and the result. This paper identifies the market background to commercial property lending and discusses the implications of the falls in value for lenders and valuers. These include two major strands; first, the outcome of discussions between the representative bodies of these two groups and, second, the increasing litigation caused by lenders suing valuers for professional negligence. The discussions between representative groups have driven a debate on the valuation process leading to a number of reports and guidance notes. This paper discusses the outcomes paying particular attention to the basis of valuation for loan purposes and the provision of additional information in valuation reports. This paper also reviews the legal framework which influences the relationship between the lenders and valuers and discusses the duty of care. The role of instructions in the valuation process, the significance of the identity of the person to be advised and the possibility of a conflict of interest arising are all considered. The paper also addresses the issue of the standards required of a commercial loan valuer, including how this is interpreted by the courts and the legal status of professional guidance notes. The paper concludes by identifying potential areas for dispute within the loan valuation process and raising a number of research questions concerning the operation of this process which are addressed in a following paper.\ud \ud \ud \ud \ud \ud

This paper represents an independent review of concepts, bases and applications of real estate valuations in response to the current EU and EBA deliberations concerning a prudent property valuation approach developed by the Bank of International Settlements within its Basel III guidance.\ud \ud The paper has been produced in collaboration and consultation with the academic and practicing residential and commercial real estate community. The research steering group included representatives from the three main valuation international standards setters covering the globe and Europe. It also included representatives of the National Associations of Romania and Spain