Value in a Changing Built Environment

DAVID LORENZ is co-chair of the Centre for Real Estate at the Karlsruhe Institute of Technology (KIT) where he is Professor for Property Valuation and Sustainability. David is also the director and founder of a real estate management, valuation and consulting firm located in the southern part of Germany. He has more than 15 years of experience in valuation, asset management and property development, has published extensively on the role of sustainability in real estate management and valuation, and is a Fellow and Spokesperson of the Royal Institution of Chartered Surveyors (RICS). In the past he was actively engaged with several research projects administered by RICS and the UN. PETER DENT is affiliated to Oxford Brookes University where he currently participates in International programmes in real estate valuation and finance. For eight years he was the Head of the Department of Real Estate and Construction before taking up the post of Comerford Climate Change Fellow in 2008. Latterly he was Director of International Programmes helping to develop and manage professional and academic programmes. During his career he has published widely including two books: Property Markets and Sustainable Behaviour (2012) and Towers, Turbines and Transmission Lines: Impacts on Property Value (2013). TOM KAUKO is an academic labourer with wide remit within real estate economy and urban affairs. He received a M.Sc. degree in Real Estate in 1994 (Helsinki University of Tech, Finland), and a Ph.D. in Geography in 2002 (Utrecht University, The Netherlands). He has worked for Oxford Brookes University, UK, the Norwegian University of Science and Technology and OTB Research Institute, Delft University of Technology, The Netherlands. He has carried out research on urban real estate, housing and land-use studies. He is currently based in the historic seaside town of Portsmouth (UK), where he works with lecturing and research for the School of Civil Engineering and Surveying at the University of Portsmouth. His interest is in strategic issues such as valuation, sustainability, urban renewal, resilience, and innovations, and related spatial development and town planning issues. He has over 70 publications and c. 100 conference presentations.

About the Editors xi

Note on Contributors xiii

Introduction 1

The Book’s Main Theme 2

The Book’s Key Messages 3

The Book’s Methodology and Starting Points 5

Brief Description of the Current State of Affairs, Developments and Changes 5

Analysis of Likely Consequences for Valuers, Valuation Theory and Practice 7

Explanation for Proposing Alternative Protocol to Valuation and Decision-Making Processes in the Property Industry 9

Part 1 Gap Analysis: Anomalies and Paradoxes, Questions, Dilemmas and Motivations 13
Tom Kauko, Peter Dent, Stephen Hill, Maurizio d’Amato and David Lorenz

Background 13

Property Market Impacts 15

Out of the Comfort Zone 15

The Social Mind 19

Lack of Political Awareness in the Profession about Changes in Value Systems 20

Professional Values 21

‘Wrong Coding’ of the Market System 22

Lack of Linkages to Any Belief System 24

Concluding Remarks 26

Part 2 A Theory of Value in the Built Environment 29

2.0 Introduction 29
Peter Dent

Property Ownership 30

Cognitive Economy 30

Behavioural Characteristics 31

Moral Values 31

Sustainable Decision-Making 33

2.1 Economic Value: Value, Price andWorth 34
Peter Dent and David Lorenz

The Dominant Economic System 34

Rational Knowledge 35

Value 36

Price 39

Worth 40

Concluding Remarks 42

2.2 Sense and Categories of Value 43
David Lorenz, Peter Dent, Tom Kauko, Thomas Lützkendorf and Stephen Hill

Sense of Value 44

Categories of Value 45

Part 3 Valuation Methodology 51

3.0 Introduction 51
David Lorenz and Tom Kauko

3.1 Aspects of Residential Value AnalysisMethodology 53
Tom Kauko

Introduction 53

Conceptualisation 55

Methodology 58

Practical Applications 61

Summary and Concluding Discussion 62

3.2 Aspects of Commercial Property Valuation and Regressed DCF 63
Maurizio d’Amato

Regressed DCF 64

Discount Rate, Risk Premium Determination, and

Regressed DCF 65

An Application of Regressed Models A, B, and C to Bucharest

Commercial Real-Estate Market 66

Model A 68

Model B 73

Model C 77

A Real-Estate Market Risk Premium Map 81

Conclusions and Further Directions of Research 83

3.3 The Significance of Land Attributes in Determining the Types of Land Use 84
Malgorzata Reniger-Bilozor and Andrzej Bilozor

Introduction 84

Method for Determining the Effect of Real-Estate Attributes on Land-Use Function with the Use of the Rough Set Theory 85

Concluding Remarks 95

Part 4 Empirical Applications of Market Analysis 97

4.0 Introduction 97
Tom Kauko

Shift in Focus 97

Presentation of Individual Chapter Summaries 99

4.1 Directions for Exploration of NewMethods of Identifying and Determining Relationships and Dependencies on the Real-Estate Market 102
Malgorzata Renigier-Bilozor and RadoslawWisniewski

Introduction 102

The Real-Estate Sector – Analysis and Challenges 104

The Real-Estate Market System 105

The Participants (Entities) of the Real-Estate Market 107

Real Estate and Its Characteristics 109

Research and AnalyticalMethods 111

4.2 Economic Sustainability, Valuation Automata and Local Price Development 119
Tom Kauko

Introduction 119

The Need for a Sustainable Housing Market 121

The New Paradigm of Modelling Value – Is AVM the Solution? 124

Designing an Empirical Modelling Method 126

Data Preparation 129

The Results of the Analysis 130

The Principle of Smoothing the Value Using a SOM Approach 132

Conclusions and Discussion 134

4.3 Evaluation of Selected Real-EstateMarkets – A Case Study from Poland 137
Malgorzata Renigier-Bilozor and RadoslawWisniewski

Introduction 137

Perfect versus Imperfect Real-Estate Markets 138

Analysis of Selected Real-Estate Markets in Poland – Case Study 139

The Use of the Rough Set Theory in Real-Estate Market Analysis 148

Conclusions 150

4.4 Cyclical Capitalization 151
Maurizio d’Amato

Introduction 151

Real-Estate Market Cycle 152

Income Approach and International Valuation Standards 153

Cyclical Capitalization 155

The Primum Group of Cyclical Capitalization 157

The Meaning of g Factor or Δa 157

The Primum Group 157

The Secundum Group of Cyclical CapitalizationMethods 162

The Tertium Group of Cyclical CapitalizationMethods 164

The Quartum Group of Cyclical CapitalizationMethods 166

Application of Cyclical CapitalizationModels to London Office Market 167

Time-Series Analysis for Cyclical Capitalization Application 167

Conclusions 171

Part 5 Towards a More Sustainable Real-EstateMarket 173

5.0 Introduction 173
Peter Dent

5.1 Professional Responsibility 175
Stephen Hill, David Lorenz, Peter Dent and Thomas Lützkendorf

Introduction 175

Built-Environment Professionalism and Professional Bodies 176

General Guiding Principles and Role within the Institutional Framework 176

Professional Bodies at Risk 177

Sustainability Literacy in Built-Environment Professionalism 178

The Ethics of Built-Environment Professionalism 179

Professional Disciplines in a Social, Environmental and Economic

Context 179

How Ethical Are Professional Codes of Conduct? 181

European Institutions 183

Responsibility and Accountability for Outcomes: Future Professionals 186

Taking Personal Responsibility for the Other 189

Professional Sustainable Practices 191

5.2 Professional Approach 194
Peter Dent and David Lorenz

Introduction 194

Bottom-Line Approaches 195

AWay Forward 196

Proposed Changes Regarding Current Valuation Practice and Standards 198

Conclusion 198

Appendices 201

References 213

Index 231