Report January 2013 RICS Research · RICS IPD Valuation and Sale Price Report European Summary 2012 Report for Royal Institution of Chartered Surveyors

Report January 2013

RICS Research

RICS IPD Valuation and Sale Price Report Europe Summary 2012

rics.org/research

RICS IPD Valuation and Sale Price Report European Summary 2012

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The views expressed by the author(s) are not necessarily those of RICS nor any body connected with RICS. Neither the authors, nor RICS accept any liability arising from the use of this publication.

The RICS Research Trust, a registered charity established by RICS in 1955 to support research and education in the field of surveying.

Copyright RICS 2013

rics.org/research

RICS Research team

Dr. Clare Eriksson FRICS Director of Global Research & Policy

[email protected]

James Rowlands

Global Research & Policy Project Manager

[email protected]

Amanprit Johal Global Research & Policy Project Officer

[email protected]

Auriel Fielder Global Research Co-ordinator

[email protected]

Published by:

RICS, Parliament Square, London SW1P 3AD United Kingdom

A report for Royal Institution of Chartered Surveyors

Report written by:

Shan Lee Senior Research Manager IPD

[email protected]

Lorraine Howells RICS Associate Director

[email protected]

RICS Research – RICS IPD Valuations and Sale Price Report European Summary 2012 rics.org/research

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d1.0 Foreword ..................................................................................................................................................05

2.0 Introduction .............................................................................................................................................07

3.0 Analysis and Findings .....................................................................................................................08

List of FiguresFigure 1 Proportion of sales sold above/below their preceding Market Adjusted Valuation, % 2011 ...................................09

Figure 2 Weighted Average Absolute Differences, % 1999-2011 .......................................................................................09

Figure 3 Average Direction Differences 2011 %.................................................................................................................10

List of TablesTable 1 Valuation price differences, % 2011 ....................................................................................................................08

Table 2 Distribution of Transactions by Average Un-weighted Direction Difference Bands, % 2011 (2010, 2009) .............11

Table 3 Sample Sizes, 1998-2011 ....................................................................................................................................11


What is Market Value ?The definition of “Market Value” follows the International Valuation Standards Council (IVSC) definition. The text in full is as set out in the RICS Valuation – Professional Standards and is described as:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after property marketing where the parties had each acted knowledgeably, prudently and without compulsion”.

The words “willing seller” and “willing buyer” comprise a small section of the whole definition but understanding how this should be interpreted is fundamental to the correct application of the basis of value. The supporting explanatory text in the International Valuation Standards makes it clear that its context is thus:

“….a willing buyer refers to one who is motivated but not compelled to buy. The buyer is neither over eager nor determined to buy at any price. This buyer is also one who purchases in accordance with the realities of the current market and with current market expectations, rather than in relation to an imaginary or hypothetical market that cannot be demonstrated or anticipated to exist.” 1

“….a willing seller is neither an over eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the asset at market terms for the best price attainable in the open market after proper marketing, whatever that price may be.” 2

The Royal Institution of Chartered Surveyors (RICS) and IPD are proud to present the RICS/IPD Valuation and Sale Price Report 2012, which studies data from the 2011 IPD Annual Index for French, German, the Netherlands and UK markets and compares this against the sale prices of commercial property in those markets.

2012 is the ninth year that RICS has commissioned this study, which has become an important barometer for the investment valuation community and makes a very welcome contribution to the transparency and integrity of our market place.

Valuations are key to performance measurement and pricing within the property industry. This report provides vital analysis of the performance of the valuation profession in the larger European property markets, by tracking the difference between valuations of real estate against actual sales.

The first study in this format was published in 2003 and since then the commercial real estate market has presented some dramatic highs and lows. 2004-2007 was characterised by unparalleled growth, followed by falls in 2008 after the collapse of Lehman Brothers and the contagion that now surrounds the Eurozone crisis. The years since have presented a real test to the skills of property valuers worldwide, particularly relating to the speed that they have been able to reflect market conditions and this has been evident in the results presented in these reports.

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1 IVS Framework 2011 (30d) 2 IVS Framework 2011 (30e) 05


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2.0

Intro

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ionIn other words, it is of no consequence that the actual

owner of the property is not prepared, or un-willing to sell in the actual market, whether it is rising or falling. The factual circumstances of the owner are not part of any consideration because the willing seller is a hypothetical owner.

It is the nature of markets that values rise and fall with the passage of time. The real estate market is not isolated from this cycle. In fact, due to the drivers of supply and demand, the rise and fall of real estate is often more profound than it is for other markets. Suggestions that there are no willing sellers in a falling market are sometimes made by commentators who have either little understanding of how markets operate, or have their own motives to change this definition. It is no more correct than saying that there are no willing buyers in a rising market.

Those who question either rapidly rising or falling valuations must remember that it is the valuers’ role to track the market as they see it, not how they would like it to be. Market Value demands that the valuer marks to market, which does not make an allowance for longer term value or “worth” and which can often result in large peaks and troughs in valuation, rather than a smooth transition which longer term value would allow for.

The European MarketDespite ongoing and political turmoil, the European commercial real estate market showed resilience in 2011 with a 5% growth in invested stock when measured in local currency. Despite this growth, there were sharp contrasts in trends. For example, the Continent showed a wide range of growth rates from -6% in the Baltic states to more than 19% in central European countries, boosted by strong capital growth in Poland. The Nordic countries also continued to outperform the regional average with a 7% increase in invested stock. By contrast, lower growth was registered in Germany with a modest 2% increase in 2011. Growth also halved in France to 6% from 11% the previous year.

European real estate invested stock is dominated by the UK, Germany and France which accounts for approximately 50% of the total. Germany was in fact overtaken by France as the second largest commercial real estate market in Europe, as growth in France was triple of that in Germany.

The eurozone crisis has impacted heavily on real estate and the European market but despite this weakening sentiment in the second half of 2011, a strong final quarter took annual investment volumes to €112bn, which is an increase of 9% on 2010. This took the market back to its 2008 level of investment volumes, albeit well below the 2005-2010 average.

IPD DataThere was a shift in the number of sales analysed by IPD in the subject locations. France saw a large dip in sample size with 167 transactions analysed as opposed to 557 in the previous year. The Netherlands also saw a decline with 150 properties analysed in 2011 from 222 in 2010. By contrast, there was an increase in German assets at 166 from 107 the previous year. It was in the UK that you see the most significant jump in analysed units from 652 in 2010 to 1,164 in 2011. The UK is subject to a separate report so we will not concentrate on it here.

The analysed data identifies a worse trend in spread in France and Germany of sales within +/-10% since the last valuation. This now stands at 37% in France compared with 40% in the previous year. However, this spread has improved in the +/-15% range of 50% compared with 48% last year. Germany fares poorer with 44% of properties sold in the +/-10% range compared with 50% the previous year. The spread is also worse in Germany for those properties sold within +/-15% which stood at 52% in 2011 against 65% in 2010.

When you look at this on a weighted basis, the distortion in Germany and France appears to have come from the larger assets which look like they were sold at a greater premium to their preceding valuations in comparison to the smaller assets. This also reflects a small turnaround in the German market with positive capital growth during the year.

By contrast, the spread in the Netherlands of sales within +/-10% appears to have fared very well within 12 months. This stood at 74% in 2011 compared with 64% the previous year and actually displayed the tightest market of all of the main markets, including the UK.


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ion The IPD Valuation and Sale Price research study has been

running for over 20 years and was first undertaken as a collaborative study with the RICS in 2003, in response to the Carsberg report recommendations. This advised that the relationship between achieved sale prices and previous valuations should be monitored on an annual basis.

The analysis in the European Summary covers the markets of France, Germany, the Netherlands, and the UK at the all property level and addresses several key questions:

1 How much do sale prices differ from previous valuations?

2 Are differences random or were sale prices consistently above or below the latest valuation?

3 How much did the results differ across the four European markets?

Addressing these questions has involved market adjusting nearly 1,650 market valuations delivered across 2010/11 for average movement between valuation and sale dates and then applying a rigorous set of tests against the corresponding achieved open market transaction prices.

A summary of the main measures referred to in this report:

• Preceding Market Adjusted Valuation

– The most recent valuation in the IPD database which must have been recorded a minimum of three months prior to the sale date. This is then adjusted for market movements in values by applying capital growth rates up to the third month before the sale. Finally, capital expenditure between the last actual uninfluenced valuation month and the updated valuation month is added to the updated valuation.

• Average Price-Valuation Differences

– Average Absolute Difference – the average difference between an asset’s sale price and its preceding Market Adjusted Valuation regardless of whether the adjusted valuation is above or below the sale price.

– Average Direction Difference – the simple difference between an asset’s sale price and its preceding Market Adjusted Valuation.

– Differences are analysed on both an un-weighted and value-weighted basis with the latter assigning greater importance to more valuable assets.


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Table 1 Valuation Price Differences, % 2011

France Germany Netherlands UK

Capital Growth 2.7 0.2 -1.5 1.9

Unweighted Average Absolute Difference 17.4 19.9 8.6 11.0

Weighted Average Absolute Difference 21.7 13.6 6.0 10.2

Unweighted Average Direction Difference 5.0 4.7 1.4 0.7

Weighted Average Direction Difference 16.9 10.6 0.9 6.6

Source: RICS/IPD

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The headline 2012 findings across the four major markets were as follows:

• In 2011, the value-weighted average absolute differences between sale prices and preceding Market Adjusted Valuations ranged from 6.0% in the Netherlands to 21.7% in France. Treating all assets equally, regardless of capital value, Germany reported the widest unweighted spread, at 19.9%.

• In the past, there has been evidence to suggest that current market trends were related to the difference between the sale price of an asset and its preceding Market Adjusted Valuation. On an average weighted absolute difference, current market trends tended to follow the previous years’ performance and influenced subsequent differences. This was not the case for most markets in 2011, with the exception of France where there was a record increase in average weighted absolute difference compared to all previous years.

• Average weighted direction differences, which measure whether values are under or over-stated, were positive in all four markets. Compared to 2010, the Netherlands and the UK recorded a decrease in their average weighted direction differences.

• Compared with the 2010 results, when Germany was the only market where the majority of assets were sold at prices below their preceding Market Adjusted Valuations, 2011 results (Figure 1) showed that this trend has shifted to be the case for the UK market.

• Germany experienced the largest increase in the proportion of assets being sold above their preceding Market Adjusted Valuations (Figure 1).


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• All markets experienced a decrease in the weighted average absolute differences, with the French market being the only exception. France saw the largest increase in this difference – therefore, on average, sale prices differed from their preceding Market Adjusted Valuations by a greater margin to what was observed in 2010 (Figure 2).

Source: RICS/IPD

France

Germany

UK

Netherlands

100-100 50-50 0

AboveBelow

Figure 1 Proportion of sales sold above/below their preceding Market Adjusted Valuation, % 2011

• Historically across all four markets, the trend was for more valuable assets to be sold at prices closer to their preceding Market Adjusted Valuations, as indicated by a lower weighted average absolute difference than unweighted. 2011 was no different, as it saw a continuation of this trend in all markets apart from France, where smaller assets were sold for prices closer to their preceding valuations.

Source: RICS/IPD

Figure 2 Weighted Average Absolute Differences, % 1999-2011

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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20

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UKNetherlandsGermanyFrance

Year


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Source: RICS/IPD

France

UK

Netherlands

Germany

Figure 3

18.014.00 12.010.02.0 8.04.0 6.0 16.0

Average Direction Differences 2011, %

Unweighted Weighted

• On an average unweighted basis, all markets saw assets sold at a premium although this was noticeably lower in the UK.

• On an average weighted basis, France and Germany markets saw larger and more valuable assets sold at the greatest premium to their preceding valuations than smaller, less valuable assets (Figure 3). In comparison with other markets, France saw a record high weighted premium.

• 2011 reported a turnaround in the German market compared to 2010, with positive capital growth. Other markets saw lower capital growth in 2011, compared to previous years while the Netherlands saw capital value fall 1.5% p.a..

• The spread of sale prices about preceding valuations was wider in all markets. In 2010, a lower proportion of transactions sold for within +/-10% of the preceding Market Adjusted Valuations in France and Germany and this continued to be the case through to 2011. France experienced a record low with 37% of transactions within the +/-10% band in 2011 (Table 2).

• The UK displayed the tightest of all the markets’ spreads in 2010, with 82% of properties sold for within +/-20% of their preceding Market Adjusted Valuation. In 2011 it was the Netherlands, with 91% of properties sold for within +/-20% of their preceding Market Adjusted Valuation.


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Source: RICS/IPD

Table 3 Sample Sizes, 1998-2011

Source: RICS/IPD

Table 2 Distribution of Transactions by Average Unweighted Direction Difference Bands, % 2011 (2010, 2009)

+/- 10% +/- 15% +/- 20%

France 37 (40, 63) 50 (48, 78) 58 (52, 86)

Germany 44 (50, 53) 52 (65, 59) 60 (75, 69)

Netherlands 74 (64, 65) 87 (75, 82) 91 (80, 88)

UK 68 (57, 55) 80 (72, 71) 87 (82, 82)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

France 27 97 123 262 366 355 370 402 485 527 519 505 557 167

Germany 30 77 85 142 313 247 300 257 617 483 190 64 107 166

Netherlands 148 228 210 369 487 418 286 361 296 318 197 197 222 150

UK 1274 1648 1114 1318 1340 1216 984 1006 1020 903 1233 1042 652 1164


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Con

tact

Det

ails For further information please contact:

IPDShan Lee Senior Research Manager IPD | An MSCI Brand 1 St John’s Lane London EC1M 4BL England

+44 (0)20 7336 9200 +44 (0)20 7336 9345 [email protected] www.ipd.com

RICSBen Elder BA BSc FRICS ACIArbGlobal Director of ValuationRICS12 Great George StreetLondonSW1P 3AD

+44 (0)20 7695 [email protected] www.rics.org


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Report January 2013 RICS Research · RICS IPD Valuation and Sale Price Report European Summary 2012 Report for Royal Institution of Chartered Surveyors