Motivation for Rotation

Real estate in its widest sense, “the built environment”, represents and enormous pool of wealth within any economy. It has been estimated that up to 75% of the wealth of many economies is accounted for in its land and property. As such the audited value of an economy’s building stock is of enormous importance, not just for good “housekeeping” purposes (maintaining accurate company balance sheets) but also, very importantly, land and buildings represent the main form of collateral supporting finance on which important swathes of the banking system depend.

Unfortunately land and property is an illiquid asset class transacted within an imperfect market where information and transparency will never match the level achievable in equity markets. For this reason the calculation and reporting of real estate values can only be undertaken by a relatively limited number of specialist real estate advisors supported by insurers who are satisfied with their level of knowledge, track record and integrity.
In the context of achieving accuracy in asset valuations it is widely recognised that the rotation of auditors and real estate valuers is a good thing for companies and markets. INREV (The European Association for Investors in Non-Listed Real Estate Vehicles) recommends it as a basic measure of best practice, however there is often resistance.

Funds do not generally like the risk of valuer change, as it can lead to awkward movements in value. In addition there is a lot of work on the part of the fund in changing valuer. If the fund is basically happy with their valuation service they tend to go through a tender process but ultimately not rotate, instead looking at change of signatory as a solution.
The role of Audit Committees is important and, for the good of the fund, they ought to push more for tenders and rotation. In addition it should be welcomed that they challenge the choice of valuer and if necessary request a change, so that a fresh view is obtained on value. Although rotation can lead to more short term change in values it should minimize the risk of longer term inaccuracy and ultimately, those funds that act with greatest transparency and integrity, will transmit the greatest confidence to their shareholders and the wider market.

Perhaps one day we will see listed property companies allowing their external valuer to speak at annual shareholder meetings to give their outside view of the company’s real estate portfolio. The quoted property funds that work hardest to innovate in this area will send the strongest message to their investors on the robustness of their management and confidence in their performance. At the same time these sorts of measures will lead to a better trusted and respected marketplace that in turn will pull more money into real estate and indeed the wider economy.

To some extent we have seen this already, with the Socimi (Spanish REIT) regime demanding levels of transparency in the publication of data that companies would have previously closely guarded. However, the excellent progress that has been made so far should move a step further, with quoted property companies embracing the concept of regular valuer rotation, effectively maintaining pressure upon themselves to accept greater scrutiny from outside eyes. The extra workload and risk of value volatility attached to valuer rotation we believe is a small price to pay for the greater good of a well audited property sector on which the wider economy and finance markets depend.

Tony Loughran

Head of Valuation & Advisory, Spain