Real Estate Portfolio Measures by Richard Lay (UK)

Synopsis

Traditional methods of portfolio valuation have been criticised for their inability to adapt sufficiently in an increasingly complex market, providing, according to the critics, simplistic and inaccurate analysis for the client. This paper, while accepting the need to adopt more rigorous valuation techniques in certain areas, argues that the new techniques alone will not produce better answers. When adopting an increasingly data-rich quantitative approach, the valuation is only as good as the information to which the valuer has access. Where information is historic, lacking or distanced from the market, the resulting valuation may be meaningless. Only by being close to the marketplace can the valuer accurately reflect market fluctuations in the valuation and thus provide accurate and precise advice for the client.

Synopsis

The comparison of appraisal and valuation techniques between countries must ideally review methods currently used by practitioners. In the absence of such detailed research, an impression of current practice can be gleaned by comparing recent articles in the main valuation journals in the UK and the USA. This analysis, while not definitive, suggests that certain techniques, such as discounted cash flow, are more readily accepted in the US than in the UK.

Synopsis

Accurate real estate appraisal relies upon good market analysis, sound feasibility studies and correct professional practice. This paper discusses, by way of case study, how a failure to comply with these criteria, coupled with loose management and inadequate auditing, can lead to insolvency in leading financial institutions. It concludes that there is a need for real estate appraisers to re-examine their own practices and to return to basics in their appraisal and thus provide precise, accurate valuation advice for clients.

Synopsis

A development project is characterised by many periods of negative cash flows followed by a relatively smaller number of cash surplus periods. Thus, because of the time value of money, a major risk in real estate development arises from events which extend the periods between the negative and positive cash flows.

This paper reviews the traditional methods of evaluating development projects in this context and suggests that more detailed cash flow techniques should be adopted to allow greater flexibility in appraisals, thus accounting for changes in circumstances through sensitivity and scenario analysis. However, even where such techniques are used, developments should not be viewed in isolation and consideration must also be given to the feasibility of a scheme in a corporate framework.