Correction Procedures for Appraisal-Based Real Estate Indices

Andreas Gohs

ERES from European Real Estate Society (ERES)

Abstract: This study reviews and critically discusses correction-procedures (also called "unsmoothing-procedures") for appraisal-based indices.Indices tracking values of direct commercial real estate investments are in custom constructed in an "appraisal-based style" : Since transaction prices are scarce, values from regular intervals of appraisals for each "index property" are taken for index calculation. Alas, appraisal-values not necessarily match transaction-prices or true market values of properties. Instead they deviate from market-values due to biases which result from surveyors’ behaviour in appraisals and index construction processes. In the past, some scientific authors suggested to correct (or "unsmooth") appraisal-based indices from several types of biases. They claim that the corrected index returns should rather match the returns of the true market values than the original index returns.Primarily appraisal-based indices were calculated and published for the USA and UK as convenient target markets for investors. So one long series of an appraisal-based index which is appropriate for time series analysis is the NCREIF Property Index for U.S.-properties. The total index is composed of an income and a capital/appreciation component. The application of the correction procedures and the focus of this study is the NCREIF Appreciation Index. The techniques of the correction-procedures are discussed referring to the NPI and meaningful modifications are proposed.

Keywords: appraisal-based; appreciation index; correction-procedure; Direct Real Estate; unsmoothing (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2017-07-01
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