Emerald | Journal of Property Investment & Finance

Dual Rate Taxed Valuation: A More Rational Approach

Nelson Chan, Norman Harker — 2012-01-06 00:00:00.0

Abstract

Purpose - This paper re-visits the problems of taxation consequences of sinking fund in the UK. It looks at what is believed to be the only rational reason for using the Dual Rate adjusted for tax method variant. Design/methodology/approach - The structure of this paper is: 1. Valuing a freehold and a leasehold interest by the single rate gross and net of tax approaches to show the logic that works with freehold valuation interest may not work with leasehold valuation. 2. Exploring the tax impacts on sinking fund. 3. Resolving the taxation issue of sinking fund. 4. Demonstrating the solution to the "Double Sinking Fund Problem" by the Greaves method and the Single Rate Net of Tax approach. 5. Exploring the future of the dual rate theory. 6. Conclusion. Findings - It confirms that the traditional method is not satisfactory even after the modifications made by the various methods mentioned above. The Single Rate Net of Tax approach is proved to meet all expectations and can be regarded as a more rational approach to the Dual Rate method.Practical implications - Valuers of the "UK School" might consider that not only should Dual Rate valuation be regarded as defunct, but also that the more appropriate approach might be to move to a net of taxation approach.Originality/value - This paper is the original work of the authors

The value of sustainability in real estate:A review from a valuation perspective

Georgia Warren-Myers — 2012-03-02 00:00:00.0

Abstract

Purpose - To synthesise the plethora of research that has been conducted into the relationship between sustainability and market value in real estate, by critically analysing the research and the applicability of sustainability and value research in valuation practice.Design/methodology/approach - The research on the relationship between sustainability and market value in real estate is examined from the perspective of its usefulness to the valuation profession in providing guidance, information and evidence to be used in valuation practice. Findings - Existing research conducted into the relationship between sustainability and market value has not provided the valuation profession with evidence which would allow the incorporation of normative theories on the value of sustainability in valuation practice. This review highlights the lack of evidence, and the applicability of current research into sustainability and value to the valuation profession in providing guidance and information in valuing real estate incorporating sustainability. Research limitations/implications - This paper highlights the limited applicability of research to date in regard to the relationship between sustainability and market value for the valuation profession. The lack of historical evidence, data or information on the quantifiable effects on market value of this new trend (sustainability), leaves the valuation profession uncertain as to the relationship between sustainability and market value. Practical implications - There is a probable risk of valuers interpreting strategic research incorrectly, and making inappropriate adjustments or comparisons because of their lack of knowledge and limited sustainability assessment skills. Although there is an evolving body of knowledge, there is a need for extensive analysis of unbiased, evidence-based research in individual and broader markets to provide guidance, evidence and knowledge of the implications of sustainability in the valuation of real estate. Originality/value - The examination of research investigating the relationship between sustainability and value from a valuation perspective provides an alternative insight into the applicability of current research in valuation practice. The increasing profile and role of sustainability in the real estate sector needs to be addressed in valuation practice, however, the variety of research to date needs to be interpreted by valuers in the correct context. This paper brings to light the applicability of sustainability and value research for the broader valuation profession, and the potential implications of misuse or misunderstanding of that research.

German valuation: Review of methods and legal framework

Tobias Schnaidt, Steffen Sebastian — 2012-01-10 00:00:00.0

Abstract

Purpose - There is a continuing discussion whether the German valuation methods are inaccurate and inferior to the British standard. The enduring efforts for a European and internationally standardised valuation method and value definitions intensify this discussion. The German valuation system is said leading to valuations which do not reflect actual market conditions and excessive smoothing. Not surprisingly, German surveyors usually disagree and claim that the German valuation approach with its sustainable rental value fulfils not only its purpose but is more transparent and thus superior to the approach usually applied in UK.Design/methodology/approach - The paper analyses the German valuation methods and highlights the predominant differences to the British valuation standards.Findings - The paper shows that the discussed valuation methods should lead to comparable results. Practical implications - The legal framework of the German valuation approaches can therefore not be blamed for any of the observed empirical phenomenon.Originality/value - Discussion of the recently adjusted German valuation methods.

Rational Expectations? Developer Behaviour and Development Cycles in the Central London Office Market

Franz Fuerst, Anna-Maija Grandy — 2012-03-02 00:00:00.0

Abstract

Purpose - Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. This empirical study of the Central London office market from 1987 to 2009 tests for evidence of rational, adaptive and naive expectations. Design/methodology/approach - Two parallel approaches are applied to test for either rational or adaptive/naive expectations: 1) VAR approach with Granger causality tests and 2) recursive OLS regression with one-step forecasts. Findings - Applying VAR models and a recursive OLS regression with one-step forecasts, we do not find evidence of adaptive and naïve expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, our results confirm that developer decisions are explained to a large extent by contemporaneous and historic conditions in both the City and the West End but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations. Research limitations/implications - More generally, the results of this study suggest that real estate cycles are largely generated endogenously rather than being the result of large demand shocks and/or irrational behaviour. Practical implications - Developers may be able to generate excess profits by exploiting market inefficiencies but this may be hindered in practice by the long periods necessary for planning and construction of the asset. Originality/value - This paper focuses the scholarly debate of real estate cycles on the role of expectations. It is also one of very few spatially disaggregate studies of the subject matter.

Shariah Compliant Real Estate Development Financing and Investment in the Gulf Cooperation Council

Muhammad Faishal Ibrahim, Seow Eng Ong, Kola Akinsomi — 2012-03-02 00:00:00.0

Abstract

Purpose - This paper investigates Shariah compliant real estate development financing and investment in the Gulf Cooperation Council (GCC).. Design/methodology/approach - In this paper, we employ desk research and survey to examine issues relating to Shariah compliant real estate development financing and investment. Following the desk research, we conduct 18 in-depth interviews with senior executives of banks, real estate developers and consultants. Findings - We find that equity Shariah instruments are in high demand by real estate investors, however rarely offered by Islamic banks. In addition, our survey results confirm that Islamic financiers tend to partner real estate companies through land acquisition to post construction, contrary to how conventional financiers operate therefore reducing moral hazard issues.Research limitations/implications - As Shariah compliant real estate research and knowledge is limited, the authors faced a challenge in getting respondents who are familiar and willing to participate in the interview. Nevertheless, the 18 respondents had given adequate inputs to enable the authors to write the research paperPractical implications - The paper includes challenges and implications for the future developments of Shariah compliant real estate development financing and investment. Originality/value - This paper provides the Shariah compliant perspective of real estate development financing and investment, where the current knowledge is very limited.

Risk and Uncertainty in Development: A critical evaluation of using the Monte Carlo simulation method as a decision tool in real estate development projects

Nick French, Pavlos Loizou — 2012-03-02 00:00:00.0

Abstract

Purpose - Real estate development appraisal is a quantification of a possible future outcome. In the static model, the developer relies upon a determination of the "most likely" outcome by pricing the land using the income from the sale of the completed development and the expected cost of development. To try to assess the risk of a different outcome to the one expected, the appraiser will often carry out a sensitivity analysis on the above calculation. This may be in the form of a simple scenario analysis that looks at the best and worst scenarios, and which typically does not take into account uncertainty and the range of outcomes that can happen. Design/methodology/approach - A fuller analysis may include an examination of the uncertainties in each of the components of the appraisal and account for the appropriate distributions of each of these variables. This is generally referred to as a Monte Carlo simulation. The argument in favour of a Monte Carlo simulation is that it helps the appraiser have a better understanding of the possible outcomes for the development and the relative impact of each input in the pricing of the project. Findings - This paper deals with the appropriateness of using the Monte Carlo simulation as a technique to calculate risk in real estate development. The paper is divided into two interlinked segments. The first segment examines the general definition of risk and Monte Carlo simulation methodology as a tool to estimate risk. The second outlines the appropriateness of using Monte Carlo as a tool to model real estate development, given the lack of data quality and its inability to account for human relationships in the development process.Practical implications - A lot of work has been done looking at scenario modelling with probabilities and the results that ensue. However, it is important that these quantitative results are placed in the context of the heuristic and cognitive approaches adopted by the decision maker. In other words, the behaviour of the decision maker is as influential in the interpretation of the results as the numbers themselves. This paper looks at the advantages and disadvantages of using Monte Carlo simulation in this context Originality/value - This study contributes significantly to the practical application of probability-based models to development appraisal. The findings of the study are useful for users of feasibility studies to understand the context in which a development feasibility is carried out, and for appraisers to extend the scope of their analysis when carrying them out.