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

2. 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)

3. A Conceptual Framework

4. 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)

5. Some Context: The UK Market Correction

7. Some Context: UK CRE Unit Trust Redemptions

8. 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 …

9. 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”

10. 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?

11. Preliminary Results  Initial Analysis: Test the CLM (2010) Results  6,700 Records with Capital Value Changes Q3 2007  Include Cumulative Growth to Previous Quarter  Analyse by Quarter Q3 2007 to Q4 2008 Half Year H2 2007 to H2 2008 Cumulative to Q3 2008, Q4 2008

12. 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

13. 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 -2.4844.8920.6601.378-1.0292.627 Open Ended Funds -1.341 (-10.871***) 1.006 (6.132***) -0.373 (-2.771**) -0.351 (-2.762**) 0.054 (0.393) -0.807 (-4.166***) Closed End Funds -0.092 (-0.368) 1.786 (5.426***) 0.760 (2.592**) -0.667 (-2.889**) 0.093 (0.393) -1.713 (-4.515***) Listed Firms -0.559 (-3.078**) 1.948 (8.464***) 0.011 (0.052) -0.078 (-0.429) -0.008 (-0.321) 0.904 (2.948**) Adj. R 2 15.8%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 627262426218620561276098

14. Another Look at Q4 …  Redemptions were high in Q4 2007 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 Q4 2007 Constant 24.32 Open Ended Funds -0.462 (-2.835**) Closed End Funds 0.976 (3.075**) Listed Firms 0.724 (2.138*) Adj. R 2 12.6% F statistic13.277*** N of Cases 3709

15. Half Yearly Results H2 2007H1 2008H2 2008 Constant 2.0241.7160.554 Open Ended Funds -0.537 (-2.512*) -0.620 (-3.299***) -0.578 (-2.599**) Closed End Funds 1.671 (3.743***) 0.044 (0.120) -1.572 (-3.689***) Listed Firms 1.297 (4.196**) -0.216 (-0.408) 0.754 (2.088*) Adj. R 2 21.4%8.5%23.2% F statistic100.96***33.14***102.08*** N of Cases 624261886098

16. Cumulative Capital Value Shift to Q4 2008

17. 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?

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