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Appraisals around the World -
Determining true market value

As cross-border investment increases on a global basis, investors must consider the differences that exist from market to market when it comes to commercial real estate appraisal or property valuation - the term most often used outside the United States.

While the objective of appraising a commercial property remains the same whether you're in Chicago, London or Tokyo - to provide a close estimate of a property's true market value - there are three different foundational approaches to valuations: sales comparison, cost-basis and income appraisal methods. In general, most European countries use the same approach, while the same is true of Asian countries. And, of course, all states within the U.S. use the same appraisal methodology.


But, there are some differences in the nuances and in the details of how the methods are applied, says Matthew G. Kimmel, principal of valuation services with Deloitte Financial Advisory Services LLP. "You'll find in some areas of Europe they'll not only use direct capitalization methods, they may even use some extraction methods to get to land value and may treat certain expense items differently than we would find customary [in the U.S.]," he notes.

Although the appraisal process used in the U.S. and in other countries is often similar, the assumptions used may be different, says Jayne Day, chief credit officer of GE Real Estate. "Some areas of the world - Japan, for example - will use historical net operating income numbers for properties instead of a more forward looking forecast so your values often lag the market," she explains.

Availability of data

Outside of the U.S., lack of transparency is a common problem, notes Steve Williams, spokesman for the Royal Institute of Chartered Surveyors (RICS) Americas and former RICS president.

"The U.S. has the most rigorous reporting standards in the world," Williams says. "Most states have records in their courthouses where you can get transaction data easily. No other country in the world has transparency of transaction data."

Data in the U.S. is far more available and the method of capturing transaction information, investor survey information and other information is quite robust compared to the efforts in Europe and Asia. There is also plenty of recent information that any investor can obtain online or from independent researchers and brokers. "In the U.S., you can get a very good idea about what is going on in the market today, right away," Day says.

But, that's not the case in many parts of the world, particularly in emerging markets. For example, Mexico does not have the same entrepreneurial reporting sources as in the U.S., which is also true of many Asian countries and European countries.

"There are parts of Europe that don't have a consistent method of gathering market information or comparable data to the extent that we do here in the U.S., and so that changes the appraisal process a bit," Kimmel says.

Because of the quality and availability of data, U.S. appraisers will use fairly sophisticated models to project income expenses and cash flow over a period of years. However, European appraisers or surveyors may use a single period income approach, or direct capitalization method because they don't have the same level of information. "It's a more simplified and easier approach to value which is commonly used in many of the countries in Europe," says Kimmel.

Similarly, Asian property appraisers are not quite as advanced as U.S. appraisers, Kimmel says, adding that the process of analyzing real estate details is not as extensive. However, they're in the process of developing a better system for analyzing real estate data, as well as better training and education programs for appraisers, he notes.

"In the emerging markets, and in Japan, we find it's very difficult to obtain some of that data - for trades in particular," Day says. "So when you are trying to evaluate your property against others that have recently sold, you don't have a multiple listing where you can find the information."

Establishing land ownership

Beyond market data, defining ownership of property is problematic in some countries in Europe and Asia. This is a big roadblock for investors, and title insurance companies are trying to address it. Unfortunately, few strides have been made.

"There are no title reports as we know them here in the U.S.," says Walter Winius, Jr., managing director of property valuation firm Integra Realty Resources' Phoenix office. "So the certainty of ownership is often somewhat in doubt."

In some countries, property data is less transparent and market evidence is more difficult to identify, particularly in emerging economies or those countries previously under Communist rule.

The appraisal or valuation process is complicated by the fact that in very few countries is the land owned by the people. "The land in most of these areas is still controlled by the government and makes the process a bit complicated and precarious," Winicus says.

This problem was painfully obvious to L. Deane Wilson, managing partner and chief appraiser of the Grass Valley, Calif.-based commercial real estate appraisal firm Blackwell Group. While teaching an appraisal course in Ljubljana in central Slovenia, he frequently dined at restaurant located in a building that had no paperwork or documentation to prove ownership.

"No one knew who the rightful owner was because of so many years under Communist rule," he says. "And before the Communist rule, there were the German regimes, families died off, records were lost, and after so much time actual ownership was lost."

Qualifications of appraisers

Appraiser expertise and qualifications are another major difference among the U.S., Europe and Asia.

Kimmel contends that U.S. appraisers have more advanced training including more comprehensive in the development and building of the competencies within appraisers and valuation practitioners.

However, parts of Europe are fairly advanced, specifically the UK. "The UK has chartered surveyors who typically have an engineering background rather than a financial background like they do in the U.S.," explains Kimmel, who is qualified appraiser across multiple countries and a member of both RICS and the U.S. Appraisal Institute. "They have done a nice job in developing appraisers and the process in that part of Europe."

In other European countries, the training, competency and the development of appraisers isn't to the level that it might be in the UK or the U.S., Kimmel notes. "In Asia, depending on which part of Asia you are looking at, there have been some good solid strides made in terms of developing and training appraisers and valuation specialists," he says.

However, the amount of development in Asia complicates things, Kimmel points out. "There's a fair amount of ground to be tilled there in terms of development," he says. "It's complicated because of land ownership rights and it makes [land valuation] even more challenging." In fact, some of the real estate organizations in Asia are offering property valuation courses in development and training.

Reliability of appraisals

Despite the differences in the appraisal process across the U.S., Europe and Asia, GE Real Estate's Day believes that overseas appraisals are fairly reliable - for the most part. In fact, she ranks UK appraisals as the best in the world.

"I would put UK and Australia as number one and number two, above the U.S. because of the fact that the appraisers in those regions are governed by the RICS, and in the UK appraisers take liability for their opinions," Day explains. "Also, in the U.S., the requirements and training needed by appraisers differ greatly among the states."

Wilson, the RICS spokesman, contends that most overseas appraisers are as reliable as U.S. appraisers. "However, just like the U.S., some are better than others because of their experience, knowledge and qualification, and the amount and quality of data," he says.

That's one of the main reasons why there is a growing demand for a single uniform standard for the commercial property appraisal process. Kimmel, along with Joseph Vella, chairman of the International Valuation Standards Committee (IVSC), believes that the time is coming when there will be one set of international standards for appraisals and valuations.

"I think that we are starting to see a collapsing of standards - in other words, a more uniform standard across the international scene," Kimmel says. "The financial reporting world is driving some of that. I suspect that at some point in the future there will be more consistent standards across the world."

Because of huge demand from regulators, investors and practitioners, Vella says there is a movement toward making valuation standards tie into International Reporting Financial Standards. "They are trying to provide a similar financial language anyone can use internationally," he notes, adding that the Financial Accounting Standard Board and International Accounting Standards are trying to have convergence by 2011. "We need a universal language so there's no confusion about which methodology to use."

Although most investors do rely on appraisals, there are many occasions when the appraisal takes a back seat to investor opinions. "Some of our clients -- domestic investors, investing overseas -- do rely on overseas appraisers and valuations in certain cases," Vella says. "It's an important step in the investment process. But I think that in some cases, if it's not quality appraisal work and quality data behind it, investors will make their own decisions as to how they should price certain assets and real estate in other countries."

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