Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012

Motivations  Do Clients Influence “Independent Appraisers”?  Finance Literature on Client Effects e.g. Literature on Audit Results and Company Influence e.g. Literature on Credit Rating Agencies and Issuers E.g. Literature on Equity Analysts’ Advice & Client Groups  Real Estate Literature on Appraisal Effects Typically Experimental, Interview or Survey Based  What Evidence Does Market Downturn Provide? How Do UK Valuers Behave When the Market Turns? Develop Crosby, Lizieri, McAllister (2010)

A Conceptual Framework

Client Influence on Appraisals: Prior Real Estate Research  A Sensitive Topic – Raising Ethical, Reputational, Negligence and Criminal Issues  Questionnaire Based Research e.g. Smolen and Hambleton, (1997), Worzala, Lenk and Kinnard (1998), Gallimore and Wolverton (2000), Yu (2002)  Interview Based Research e.g. Levy and Schuck (2005), Baum et al. (2000), Crosby et al. (2004)  Experimental Research e.g. Hansz (2000), Diaz and Hansz (2001), Amidu et al. (2008)

Some Context: The UK Market Correction

Some Context: UK CRE Unit Trust Redemptions

Differences in Motivation  Unit Trusts Redemption Based on Declared Net Asset Values Selling into a Falling Market Protecting Existing Unit Holders versus Exiters Incentive to Mark Values Down …  Closed End Funds / Listed Funds Geared Funds Performance Incentives Loan to Value Covenants and Lenders Incentives to Mark Values Up …  But Valuers Are Independent, Arm’s Length A Natural Experiment …

Crosby, Lizieri & McAllister (2010)  Do Open Ended Funds Exhibit Different Performance Over the Market Turn?  Attempt to Correct for Fund Composition  But Only Aggregate Information Available Information on Overall Fund Performance Attempt to Correct for Broad Fund Holdings Evidence Supportive a Client Influence Effect Open Ended Funds Fall 2.5% More than “Expected”

The Current Project  Focus on Individual Property Appraisals  Data from Investment Property Databank ~ 12,000 Individual Property Records Capital Value and CV Changes Over Market Correction Sector and Geography Attributes, Yields Size, Tenancy Details, Lease, Vacancy etc. Ownership: Fund Type  Aim: Hedonic Model of Value / Value Change Seek to Explain Differential Movement in Values Does Fund Type Matter?

Preliminary Results  Initial Analysis: Test the CLM (2010) Results  6,700 Records with Capital Value Changes Q  Include Cumulative Growth to Previous Quarter  Analyse by Quarter Q to Q Half Year H to H Cumulative to Q3 2008, Q4 2008

The Geek Bit  Variety of Models and Specifications Tested OLS with Heteroscedasticity Robust Standard Errors  Test for Multicollinearity VIFs Acceptable  Outliers and Extreme Values Winsorize the Dependent Variable at 0.5% and 99.5%  Choice of Reference Segment and Fund For PAS use “Other” Segment For Fund Type, Model both “Other” and “Insurance Co.” Examine Models with OEF dummy alone

Quarterly Cross-Sectional Results Controls: log Cap Val, Yield, Market Segment, Cumulative Prior  cv(-t) Winsorized Dependent Variable Heteroscedastic Robust Standard Errors Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q42008 Constant Open Ended Funds ( ***) (6.132***) (-2.771**) (-2.762**) (0.393) (-4.166***) Closed End Funds (-0.368) (5.426***) (2.592**) (-2.889**) (0.393) (-4.515***) Listed Firms (-3.078**) (8.464***) (0.052) (-0.429) (-0.321) (2.948**) Adj. R %18.6%6.2%6.1%5.3%13.2% F statistic 70.12*** 85.05***25.06***24.65***20.01***51.29*** N of Cases

Another Look at Q4 …  Redemptions were high in Q Positive sign unexpected?  Add Further Controls Geography/region rather than PAS segments “Quality” variables – yield relative, unexpired lease, ERV psf Compromise … missing variables reduce sample size Q Constant Open Ended Funds (-2.835**) Closed End Funds (3.075**) Listed Firms (2.138*) Adj. R % F statistic13.277*** N of Cases 3709

Half Yearly Results H2 2007H1 2008H Constant Open Ended Funds (-2.512*) (-3.299***) (-2.599**) Closed End Funds (3.743***) (0.120) (-3.689***) Listed Firms (4.196**) (-0.408) (2.088*) Adj. R %8.5%23.2% F statistic100.96***33.14***102.08*** N of Cases

Cumulative Capital Value Shift to Q4 2008

Summary and Next Steps  Are Appraisals Independent of Client Effects?  Market Downturn Forms Natural Experiment Due to Differences in Motivations By Fund Types  Results Consistent With Client Effect in Valuations  Could Still Be Information or Composition Issue Were Open Ended Funds Forced to Sell?  Need to Improve Hedonics and Diagnostics Include More Explanatory Attributes Continue Robustness Tests, Improve Specification  Map Results Onto Other Variables What Happens to REIT NAV Discounts?

Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012