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Can Institutional Investors Bias Real Estate Portfolio Appraisals? Evidence from the Market Downturn

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Abstract

This paper investigates the extent to which institutional investors may have influenced independent real estate appraisals during the financial crisis. A conceptual model of the determinants of client influence on real estate appraisals is proposed. It is suggested that the extent of clients’ ability and willingness to bias appraisal outputs is contingent upon market and regulatory environments (ethical norms and legal and institutional frameworks), the salience of the appraisal(s) to the client, financial incentives for the appraiser to respond to client pressure, organisational culture, the level of moral reasoning of both individual clients and appraisers, client knowledge and the degree of appraisal uncertainty. The potential of client influence to bias ostensibly independent real estate appraisals is examined using the opportunity afforded by the market downturn commencing in 2007 in the UK. During the market turbulence at the end of 2007, the motivations of different types of owners to bias appraisals diverged clearly and temporarily provided a unique opportunity to assess potential appraisal bias. We use appraisal-based performance data for individual real estate assets to test whether there were significant ownership effects on performance during this period. The results support the hypothesis that real estate appraisals in this period reflected the differing needs of clients.

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Notes

  1. In common with most European property firms, and in contrast to US REITs, UK REITs and listed property companies follow IFRS and must report their real estate assets at fair value, not historic cost.

  2. Appraisals may also be conducted ‘in-house’ by internal appraisers. This paper is focused on ostensibly independent appraisals provided by external consultants.

  3. That is disagreement between appraisers on the value of the same property.

  4. IPD is part of MSCI and is the leading provider of real estate investment performance benchmarks in the UK and in many other international real estate markets.

  5. The IPD databases also contain information on leasing and building vacancy, but these data were not made available for the period studied here.

  6. They are also the largest owner group on a value-weighted basis. When values are taken into account, listed companies and REITs are more important and unit-linked funds are less important.

  7. Equivalent yield is a form of capitalisation rate that is commonly used in the UK and which reflects current rental income and a future reversion to the current level of rental value. It essentially acts in the same way as an income multiplier. It is a key assumption in the appraisal process and is usually based on analysis of transactions involving comparable assets. A change in yield typically reflects a change in the pricing of an asset as market conditions change.

  8. This was determined by comparing the tracking error for the aggregate performance of all assets held by each owner type over the period Q2 2007 to Q2 2009.

  9. These are continuous variables that take either the value of the excess yield where this is above (below) the segment average and zero otherwise.

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Acknowledgements

The authors acknowledge the contribution of Dr Yarim Shamsan, who compiled the data for this study while working as a joint research officer for the University of Reading and Investment Property Databank.

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Authors and Affiliations

  1. Henley Business School, University of Reading, Reading, UK

    Neil Crosby, Steven Devaney & Patrick McAllister

  2. Department of Land Economy, University of Cambridge, Cambridge, UK

    Colin Lizieri

Authors
  1. Neil Crosby
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  2. Steven Devaney
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  3. Colin Lizieri
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  4. Patrick McAllister
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Corresponding author

Correspondence to Steven Devaney.

Appendix

Appendix

See Tables 4, 5 and 6.

Table 4 Capital growth regression results
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Table 5 Rental value growth regression results
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Table 6 Yield impact regression results
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Crosby, N., Devaney, S., Lizieri, C. et al. Can Institutional Investors Bias Real Estate Portfolio Appraisals? Evidence from the Market Downturn. J Bus Ethics 147, 651–667 (2018). https://doi.org/10.1007/s10551-015-2953-1

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