Do market prices and appraisal values reflect the quality of underlying properties?

Paul Andriot, Fabrice Larceneux () and Arnaud Simon
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Paul Andriot: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Fabrice Larceneux: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Arnaud Simon: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: The indexes widely adopted by the real estate industry aims to evaluate the performance of a fund from its total return excluding the quality of the real estate property. There is a consensus around indexes based on a specific segmentation on the location (city, metropolis ...) of the property on the one hand and the typology of the asset (offices, warehouse ...) on the other hand. The construction of the index is based on a market average combining both location and typology. This indexes requiring to use many comparables. This perception of performance tends to exclude the « real » quality level of the asset in the investment decision making. Our work aims to assess the intrinsic quality of a property from its intrinsic and its financial characteristics. This methodology is based on a representative panel of the market who is in charge to evaluates the characteristics of a building. Our approach aims to add to the definition of Total Return (TR): the quality level of the building (QB), the quality of the geographical location (QL), the rental legal security (Ql) and the variation of these three levels of quality in time (bQB, bQL and bQl). Our approach aims to compare the level of management skills of an asset by an asset manager compared to the expected management of the market, on the building. That why characteriscts is no longer appreciate from a normative segmentation, but from assessments of the quality levels of the characteristics of the building. This the basis of our factor-based benchmarking approach.

Date: 2019-07
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Published in European Real Estate Conference, Jul 2019, Cergy-Pontoise, France

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