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Standard ground value in the context of the harmonization of property valuation.

Article Excerpt
Abstract

With the growing internationalization of the real estate industry, the pressure to harmonize property valuations is increasing. The International Valuation Standards Committee has addressed this need with the release of the International Valuation Standards. The standards have provided an internationally recognized market value definition, while the methods and practices of valuation remain in the discretion of the valuer. In spite of the general compatibility of valuation methods, a provision on ground value has been a continuing subject of discussion. The fundamental character of this aspect of valuation gives the discussion a pivotal role in the harmonization of property valuation. This article examines the methodological and quantitative impact of standard ground value, which inherently includes the application of remaining life. The subject of analysis is the German income method, which utilizes standard ground value. The methodological analysis examines the scope and limits of conventional income valuations as well as the amount of added information that can be derived from the standard ground value. The quantitative analysis is based on data provided by the Investment Property Databank (IPD). The data supports the conclusion of the methodological analysis that--in view of harmonized property valuation--standard ground value does not require an explicit provision, while offering added informational value in cases of short remaining building life.

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The rapidly advancing internationalization of property investment and finance has created a multitude of transnational engagements of investors, financiers, and properties, and has changed property valuation from a national to a truly international discipline. (1) The differences in national valuation approaches present a severe limitation on the informational value and comparability of property values and form a barrier to competition among property service providers and valuers. (2)

These circumstances bring about the growing need for harmonization in the development of financial reporting and valuation standards for consolidated accounts. (3) This necessity is reflected in the agendas of organizations such as the International Valuation Standards Committee (IVSC) and The European Group of Valuers' Associations (TEGoVA). (4)

Agents and Concepts for Harmonization

Obstacles to harmonization include the varying national legal systems; professional standards; and language and terminology that have to be considered and adapted. (5) In this light, the limited success of efforts to achieve a comprehensive harmonization and the lack of establishment of an "international property valuation" come as no surprise. (6)

Despite its importance, the topic of international property valuation was scarcely the focus of scientific research until recently. (7) National standards have been examined as singular entities; supranational comparative analyses are still rare. (8) A noteworthy exemption is the dissertation of Baumunk, (9) which discusses the influence of economic globalization on property and its valuation. However, even there, the potential for harmonization is considered on only a rudimentary level and limited to British and German property valuation. (10)

The most promising agents for harmonization are the IVSC and to a lesser extent the TEGoVA. The mission statement of the IVSC is as follows:

The principal IVSC objective is to formulate and publish, in the public interest, valuation Standards and procedural guidance for the valuation of assets for use in financial statements, and to promote their worldwide acceptance and observance. The second objective is to harmonize Standards among the world's states, and to make disclosures of differences in standards statements and/or applications of Standards as they occur. It is a particular goal of IVSC that international valuation Standards be recognised in statements of international accounting and other reporting standards, and that Valuers recognise what is needed from them under the standards of other professional disciplines. (11)

A significant step...

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