Bank of Greece 2 nd conference on real estate market Property valuations during crisis: consequences and risks Ioannis Ganos MRICS Chairman RICS Hellas Bluehouse Capital
Agenda 1. European Economic Environment 2. Valuation Uncertainty 3. The Red Book - application of a global standard 4. Valuer Registration Scheme
Recovery Falters In 2012 GDP % YoY 1981-2015 6 5 4 3 2 1 0-1 -2-3 -4-5 Source: Oxford Economics, October 2011 3 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EU World Eurozone
GDP Forecast 2011 Europe (tracked on map) 2.6 Not tracked < 0% Eurozone 1.6 European Union 1.7 3.0% 0.0 0.9% 1.0 1.9% 4.2% 4.0% 2.0 2.9% 1.2% > 3.0% 0.9% 2.3% 1.8% 3.0% 4.0% 2.0% 1.6% 1.7% 0.6% 0.7% 7.5% Source: Oxford Economics Source: Oxford Economics, October 2011
Most Countries Forecast To See Moderate To Robust Economic Growth GDP Growth Forecast 2011-2013 Source: IHS Global Insight, October 2011 5
Sovereign Debt Remains THE Issue Government Total Debt as % of GDP 180 160 140 120 100 80 60 40 20 0 Source: Global Insight, October 2011 6 % Greece Italy Ireland Portugal Belgium Germany France Hungary Austria Spain United Kingdom Netherlands Poland Finland Turkey Denmark Switzerland Czech Republic Norway Romania Sweden Luxembourg Russia China United States 2011 2015
Borrowing costs
Q3 2011 Office Rental Clock Evolution Q3 2007 Q3 2008 Moscow, Oslo, Zurich London City Helsinki, London West End Rental Growth Slowing Rents Falling Paris Düsseldorf, Geneva, Lyon, Stockholm, Stuttgart, Warsaw Hamburg, Munich Berlin, Cologne Copenhagen, Milan St. Petersburg Rental Growth Accelerating Rents Bottoming Out Athens Barcelona, Lisbon Dublin, Edinburgh, Madrid Amsterdam, Brussels, Budapest, Rome, Bucharest Frankfurt, Istanbul, Kiev, Prague Q3 2010 Q3 2009 Note: This diagram illustrates where Jones Lang LaSalle estimate each prime office market is within its individual rental cycle as at end of the respective quarter; Markets can move around the clock at different speeds and directions; The diagram is a convenient method of comparing the relative position of markets in their rental cycle; Their position is not necessarily representative of investment or development market prospects; Their position refers to Prime Face Rental Values Source: Jones Lang LaSalle, October 2011 8
European Office Property Clock Q3 2011 Moscow, Oslo, Zurich London City Helsinki, London West End Rental Growth Slowing Rents Falling Paris Düsseldorf, Geneva, Lyon, Stockholm, Stuttgart, Warsaw Rental Growth Accelerating Rents Bottoming Out Hamburg, Munich Berlin, Cologne Copenhagen, Milan St. Petersburg Source: Jones Lang LaSalle IP, October 2011 Athens Barcelona, Lisbon Dublin, Edinburgh, Madrid Amsterdam, Brussels, Budapest, Luxembourg Rome, Bucharest Frankfurt, Istanbul, Kiev, Prague 9
European Direct Real Estate Investment Volumes bn 80 70 60 50 Quarterly volumes Quarterly Average Q3 2011 (% change) Q-o-Q Y-o-Y All Europe +13.0% +26.6% Eurozone +11.8% +38.3% CE & Russia +78.2% +152% 40 30 55 53 66 72 60 69 63 53 20 10 0 41 30 26 17 12 13 25 21 20 24 23 37 27 26 29 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Source: Jones Lang LaSalle; Property Data (UK); Akershus Eiendom (Norway), Athens Economics (Greece), Sadolin & Albaek (Denmark), RCA Analytics, October 2011
European Average Prime Yields 7.00 6.00 5.00 % 4.00 3.00 2.00 1.00 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Q3 2011 UK 5-Year Swap Rate Office Euro 5-Year Swap Rate 10-year Bond Source: Jones Lang LaSalle, Thomson DataStream, October 2011 11 Note: The Office Yield is a weighted averages for 24 major markets in the region 11
Background Growing concern of financial regulators and stakeholders for better identification and communication of uncertainty in valuations: 1.2008: the Financial Stability Forum (FSF) published an analysis of the causes and weaknesses that had produced the turmoil in financial markets asking for more transparency in valuations. 2.2009: the G20 Declaration on Strengthening the Financial System called for improved standards for valuation uncertainty in the context of fair value accounting. 3.2009: the Basel Committee for banking supervision issued its paper Supervisory Guidance for Assessing Banks Financial Instrument Fair Value Practice. 4.2010: the Financial Services Authority (UK) published recommendations for the specific assessment of valuation uncertainty.
Increased role of Valuations IFRS Conversions IFRS 1 Assets held for sale (IFRS 5) Financial instruments IAS 39, IFRS 7 Asset/Goodwill Impairment Tests IAS 36 Property, plant and equipment Revaluation model IAS 16 Acquisitions IFRS 3 Investment property IAS 40 Intangible assets IAS 38
Nature of Valuation Uncertainty Market valuations are estimates of the most probable price that would be paid in a transaction on the valuation date However, actual prices are subject to: 1. fluctuations caused by market imperfections; 2. heterogeneity of the underlying asset (properties); 3. different objectives and motivations between the market players; 4. asymmetric information. Uncertainty is inherent in market valuations A valuation is not a fact, it is an estimate
What is Market Value??? The estimated amount for which a property should exchange on the date of valuation 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, Source: RICS and IVSC
Market Volatility, Liquidity and Activity In turbulence periods, lack of confidence results to price volatility Valuation uncertainty generally increases due to a lack of market activity, a lack of liquidity or a combination of both The effect of either reduced liquidity or activity is to reduce the amount of data available to provide empirical support for valuations This in turn increases the reliance on the extrapolation of evidence from transactions involving similar rather than identical assets or of historic transactions involving identical assets Thus, the degree of judgment required by the valuer increases thus increasing the level of uncertainty
Measuring Uncertainty A purely numeric illustration will only confirm uncertainty, not explain it. Quantifying valuation uncertainty is not simply identifying the worst case scenario. Valuation uncertainty measurement is not forward looking. Interdependence and potential netting effects across products could be considered. Incorporating correlation analysis for significant inputs. Include a sensitivity analysis supported by strengths and weaknesses commentary.
Valuation Uncertainty vs Market Risk Valuation uncertainty relates to the probability that the valuation estimate would differ from the price in an actual transaction on the same terms onthe valuation date. Market Risk is the loss an asset can face in a given interval of time due to changes in market conditions over that period.
Sources of Valuation Uncertainty 1. Status of the valuer; 2. Scope of work; 3. Market uncertainty (liquidity and market activity); 4. Model uncertainty; 5. Input uncertainty (information uncertainty and asymmetry).
The Role of the Independent Valuer To offer a professional & independent opinion Independent valuer is: recognized and relevant professional qualification recent experience in the location and category of the investment property being held Professional standards/ Independent opinion to: be connected with accounting requirements (see IFRS 13 Fair Value Measurements) meet the client s expectations To meet the auditor s expectations
Some conclusions 1. Uncertainty is inherent in any valuation because analysis of imperfect markets involves weighing the relevance of the available inputs 2. Valuation users generally accept that valuations involve judgment 3. Adequate disclosure of material uncertainty (by nature and cause)
International Valuation Standards in a Global Market What s the story? 1. International Valuation Standards why do we need them? 2. The Red Book - ethics and applying a global standard 3. Valuer Registration Scheme
Royal Institution of Chartered Surveyors RICS was created in 1868 in the United Kingdom and is the world's leading professional body for qualifications and standards in land, property and construction. International headquarters in London, with world regional offices in Brussels, Dubai, Hong Kong, New York and Sydney Over 100,000 qualified members in over 146 countries More than 71,100 trainees and students 500 industry research and policy papers published every year The key roles of RICS are to: Regulate and promote the profession Maintain the highest educational and professional standards Protect clients and consumers through a strict code of ethics Provide impartial advice, analysis and guidance
RICS Valuation Standards and Ethics 1980 1 st edition of the Red Book (RICS Appraisal and Valuation Standards) 1996 Red Book extended to bank valuations 1996 to 2003 OMV and MV exist in parallel 2003 Red Book revised into international & domestic sections Formally adopts IVS RICS drops OMV in favour of MV April 2011 the 7 th Edition Publication of Global Edition as well as UK Edition Valuation Standards rather than Practice Statements Clarification of mandatory Standards GN5 Valuation Uncertainty has been revised to GN1 Valuation Certainty
Valuer Registration Scheme The Valuer Registration Scheme (VRS) is a voluntary scheme that monitors all registered RICS members. Its aim is to ensure the quality of valuations, raise the credibility of valuers and provide clients with a clearly identifiable designation for the best-regulated and qualified professionals in the field. It was launched in mid-september 2011 in continental Europe.
Valuer Registration Scheme VRS focus and attributes Ensures consistent and high-quality valuations by helping members to apply, share and maintain global professional standards. International Valuation Standards (IVS) compliant. Identifiable in the designation of RICS Registered Valuer.
Valuer Registration Scheme What is good for clients Clients have confidence that they are working with regulated members who enforce the RICS Red Book valuation standards adhere and commit to openness and transparency are experts in their field, delivering credible and high-quality reports benefit from additional protection through VRS monitoring.
Valuer Registration Scheme is good for members RICS members who register can expect to share internationally recognised, approved valuation standards receive advice and assistance from RICS regulation and their peers benefit from a solid regulatory safeguard stand apart from the competition in terms of quality and accountability.
Reflecting Uncertainly in Valuations Publication of an RICS User Guide A document prepared for valuers and users if valuations focusing on: General understanding of the concept of uncertainty Understanding risk and uncertainty through worked examples Methods by which uncertainty in valuations may be identified Communicate uncertainly to clients with clarity
Professional Indemnity Insurance RICS Guidance outside of the UK A document is under preparation by RICS to advise on: Minimum standards for adequacy and appropriateness of PI cover Further recommendations for PI policies RICS is also working on the following: Providing a network of broker contacts for regions outside the UK Identifying a global provider of PII delivering an acceptable product for regulatory purposes.
Thank you