In the absence of continuously traded, deep and securitized markets, commercial property valuations perform a vital function in the property market by acting as a “surrogate” for transaction prices.
As with asset prices in the equity and bond markets, “commercial property valuations” are central to the inter-related processes of performance measurement, acquisition and disposal decisions on commercial real estate.
Research set out to determine the influence that valuers and valuations have on the workings of the commercial property investment market. The research involved interviews with 30 fund managers and owners and their property advisors. It found evidence that commercial property valuations do not stand above the market, but are instead an integral part of it. Opportunities for client influence do exist and appear to be used.
The research suggests that commercial property valuations may be “distorted” by two separate factors: 1) the influence of clients, and 2) the procedures which form the valuation process.
So what’s wrong with free commercial property valuations? Well, for starters, no commercial real estate broker can stay in business providing free services. If “free” valuations are requested, the only reason a commercial broker will provide such services is under the expectation of building a reputation for good work, a positive relationship with the asset owner and the reasonable expectation of the opportunity to obtain revenue producing transactions in the future. This study confirms that this does happen, creating potential liabilities for both parties.
Even though brokers may sign an “Independence” declarations for the specific valuation in question, they are not truly independent when the only reason to provide the evaluation is to obtain other business.
The report also finds the Client’s influence can be found in the procedures used in a valuation. The study reveals a widespread practice in which valuations undergo a process of “negotiation” with clients. Most commonly, the client asks their broker providing the “free valuation” to consider other comparable sales. While this may lead to improved valuations under the notion of “enhanced information quality,” it may just as easily lead to biased and less valid figures.
Asset owners and banks are better served by seeking out professional and independent commercial property valuations specialists. These firms seek out and train agents independently of any single client and have sales and operations that are functionally separate, creating actual independence in valuations and the ability for commercial agents to sign their name to this list of declarations:
- The analysis, opinions, and conclusions are my personal, impartial, and unbiased professional analyses, opinions and conclusions.
- My engagement in this assignment was not contingent upon developing or reporting predetermined results.
- I have no bias with respect to the subject property or to the parties involved with this assignment.
- My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of the report.
- I have no present or prospective interest in the subject property and no personal interest with respect to the parties involved.
- This assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan
 Funded by the Education Trusts of the Investment Property Forum, Jones Lang LaSalle and the Royal Institution of Chartered Surveyors, 1999-2000.