COMMENT: Raising the transparency bar in Europe

CBRE’s Mark Fidler reviews the changes that have taken place in European valuation practices in recent years and discusses what needs to be done to improve transparency further.

Change in Europe’s real estate markets tends to come in two sorts. You get that sudden ‘acceleration around the corner’ kind of change. Then there is that gradual, almost unnoticed change. Working as a valuer in Europe for the past 20-plus years – in Germany after reunification and these last years in the Netherlands – I have been fortunate to follow both types of change.

Next week the retail world that is gathered at MIPIM in Cannes will talk about internet shopping, same-day delivery and discount retailing. Banks will be talking about the end of the financial crisis and equity funds about this year’s loan acquisitions. All enormously important for European real estate, but self-evident. Less evident are the background shifts in the way the European real estate market functions.

There are several fundamental movements going on. The most important is that Europe is increasingly seen by global capital as a single market, enhanced by the EU as a trading bloc and the euro. Of course, each European country has its own property customs and dynamics. It is fascinating, though, to see how comfortable many of CBRE’s clients are when investing in and moving capital around Europe. True, these international investors have been buying in Europe for years, but I am struck by their sophistication, ease and local market knowledge, whether they are US equity funds or – increasingly – Asian institutions.

This ‘fluency’ in European real estate is creating a far more efficient market than was the case 20 years ago and is helping to improve the wider market. Transparency is crucial to accurate real estate values – and for a healthy real estate market for that matter. In the ‘front line trenches’ of daily valuation work, transparency means detailed knowledge of actual rents agreed, net yields actually paid, details of the buyers and how much product is available.

Digital technology
Digital technology has made the daily work of the valuer far easier than 20 years ago, particularly when it comes to gathering, analysing and reproducing deal information. We have also seen a gradual but irrevocable improvement in European valuation standards. Whereas in the 1990s the RICS in the UK was regarded as the ‘gold standard’ – and still is – the internationalisation of European real estate markets has triggered a significant rise in continental European standards. German and other European banks now issue standardised instruction letters to valuers across Europe, demanding higher levels of comparable evidence, analysis and market commentary. These international banks expect deals to be analysed on a net yield basis, not the more simplified gross yield.

And it is not just the banks. Many investor clients are also requiring higher standards of transparency, driven amongst other things by the International Accounting Standards (IAS). The RICS has linked its valuation ‘bible’ – the Red Book – to the IAS standards, resulting in increasingly more frequent references to IAS in valuation reports across Europe over the past five years.

The question for Europe now is what needs to be done to boost transparency further, an issue highlighted by the recent financial crisis which was a stark reminder of the impact on real estate when finance dries up. Compounded by the lack of investment deals in a market downturn, valuations and market monitoring become much more difficult. The better (and wider) the European market can collect its transactional data, the easier it will be to address these problems again in the future.

Transparency will of course never be one hundred percent. For very understandable, commercial reasons, landlords and tenants are not always willing to publish deal information. But we can ensure that the information which is collected, is reported in a consistent and usable way.

So the next great challenge for the European real estate market and its valuers is to establish a standardised, consistent and universally accepted system for reporting effective rents and net yields. This will give the whole European market more transparency and better benchmarks for making real estate decisions.

Mark Fidler is executive director CBRE Valuation Advisory and based in the Netherlands