EUROPE - Regulation is likely to play a big part in the future of property valuation but could actually benefit pension funds, according to valuation experts at Jones Lang LaSalle (JLL).

The effects of the market downturn could prompt regulators to introduce a sustainable value concept, which would reflect the long-term value and yield rates of property by taking out the peaks and troughs of the market, predicted Andrew Renshaw, head of valuation advisory at JLL.

"Regulation is potentially going to make a very big change to our industry in the future," said Renshaw.

"I can foresee that there might be some regulation going forward that will relate to restricting gearing with the intention of taking the peaks and the troughs out of the market. I think one of the areas that has been muted and kicked around is a sustainable value concept."

A sustainable value system would likely benefit pension funds and other long-term institutional investors whose funds are affected by market troughs, as it would reduce volatility and also provide insight into the market value of properties.

"It could be beneficial to long-term investors, particularly for pension funds, who are looking for long-term, stable returns," continued Renshaw.

"They have to match their liabilities. They are not looking for risky, racy returns, so they would particularly benefit from a sustainable valuation approach and will therefore probably be indirect supporters of it," he added.

By adopting a sustainable value concept, however, regulators would risk interfering with the market, limiting the level of gearing and reducing the amount of lending.

Renshaw argued regulation should not be tinkered with merely for balance sheet purposes as he believes investors would be less keen to develop a sustainable value concept if market conditions were good, as they would miss out on the market's peaks.

"It's got its pluses and its minuses however it's tinkering with a free market as it potentially provides an artificial cap and collar," said Renshaw.

The components used in such a concept would also be less transparent and more subjective than those of current valuation methods.

He also said he does not expect market value and fair value concepts will be interfered with.

In January, the International Valuation Standards Council (IVSC) announced changes to the IAS 40 guidelines affecting development properties under construction and requiring them to be reflected at fair value.

The changes are likely to affect retail developments in the main and the UK is expected to be less affected than the rest of Europe, as UK property companies have been carrying out valuations on developing properties for some time.

Dermot Charleson, director of the pan-European valuation advisory team, said: "Assisting clients in getting to grips with a new appraisal process is a challenge because what we have found with is that many investors in continental Europe are not familiar with the concept of valuing properties under construction.

"The appraisal approach is more complex and issues such as structures of land ownership and planning must be considered earlier in the life of the scheme whereas such developments would previously have just been booked at the cost spent until completion. Reflecting values of developments under construction at cost was purely an accounting process. However, this approach is very different as investors now need to report numbers which hinge on market value," he added.

The IVSC guideline changes have generated more work for the valuation teams at JLL so Charelson said a model should be set up enabling the team to value properties under construction at fair value, given unfinished properties are rarely traded.

The lack of comparable transactions, the disparity of pricing and the lack of transparency between valuers in different countries such as France, Germany and Scandinavia have generated uncertainty for valuers, according to Charleson.

The use of GN5, the guidance note in the red book concerning valuation uncertainty, is being seen by many who are under pressure to get valuations as a ‘get out' clause for valuers, however, Charleson insisted it is a "duty of care" to clients.

Pension funds which JLL's valuation team currently advises include Aviva, Equitable Life, Threadneedle, Essex County Council Pension Fund and South Yorkshire Pension Fund.

If you have any comments you would like to add to this or any other story, contact Poppy Sketchley on + 44 (0)20 7261 4629 or email poppy.sketchley@ipe.com

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