The Changing Ingredients Of Real Estate Valuation

Real estate valuations are not simple: many items must be considered by valuators and other real estate players. As I speak frequently with fund managers, investors, and third-party valuers, I have put together some observations on this topic. Read on for my firsthand take on this complex topic.

Politics Political changes are important to track, of course, but they generally don't alter economic cycles, which are driven by long-term fundamentals. These cycles continue to exist and to produce their effects notwithstanding political events, which may certainly have short-term impacts.

Having said that, could Mr Trump's "America First" policy have an immediate impact on EU property valuations? Not necessarily. In answering this, one might consider the dynamics of international investors: in Europe, for example, we certainly see fewer US investors, but they have been replaced by Asian investors. This trend is expected to continue.

Financial markets Financial markets certainly also influence (indirectly) property valuations. Listed stocks are part of global allocations in large institutional portfolios, though this asset class differs from real estate in terms of volatility, risks, multiples, etc. Alternatives to the stock exchange, as well as diversification, may also support interest in alternative asset classes, including real estate (though this is not to suggest that real estate is undervalued presently).

Interest rates play a key role: low, risk-free rates have led investors to adjust their return expectations across asset classes. Recent ECB discussions strengthen the view that a period of low interest rates will continue. If this is the case, real estate valuations will likely remain high: many do not expect interest rates to rise in Europe before the second half of 2018. The excess liquidity of the market means there is a lot of cash waiting to be spent, which also pushes prices upwards. This is especially true for core assets in core locations. It is, however, difficult to infer whether there is a bubble.

Various asset segments and differentiators These play a role in valuation too. The current expectations for retail are less positive than for logistics, mainly due to the growing importance of e-commerce. Student housing and care homes, for example, are certainly less dependent on the economic cycle than retail or offices are.

Location, location, location This very important element continues to represent a key driver for valuations...