The art of shopping centre valuation, the science of office valuation

Valuation is an art not a science" runs the well-known saying in valuation circles. According to Małgorzata Żółtowska of Jones Lang LaSalle, however, it should go a little more like this; ,Office valuation is a science, shopping centre valuation is an art."

In theory retail centre valuation should be more complicated than the office equivalent in this market because there are more tenants to deal with and you have to take into account turnover as well as lease income. This is a theory that Małgorzata Żółtowska subscribes to. ,The average number of tenants in a shopping centre is usually much larger than the list of tenants in an office building," she says.
,And with a retail centre you have to look more closely at the individual tenants because you have a wide range of performers. There's also the matter of how competition will evolve in a still unsettled market and other issues such as turnover related income, which is not relevant when doing an office building valuation."

Hardly a science
For Robert Mayhew of DTZ, however, such a view is not so straightforward. "On a superficial level the statement is true in that there is less transaction evidence in the retail investment market and the more evidence a valuer has the more straightforward a valuation should be. So, if there is less evidence from the retail investment market then a valuation should, on the face of it, be more opinion or 'art' than a science. But," he goes on to say, ,you have to bear in mind that in this market offices are often significantly over-rented, which may result in the application of differing yields to differing elements of the income flow."
Mayhew also adds that there have been a limited number of transactions, many of which are confidential or have been simply reported in terms of an initial yield. ,This will hide many factors such as over-renting, rents paid in differing exchange rates, rental concessions, stepped rents, irrecoverable expenses and pre-purchase agreements which may involve future payments linked to, for example, the letting of vacant accommodation. This gives an indication that although there is more evidence in the office sector, it is hardly a 'science' when it comes to valuation," he says.

Always was, always will be, an art
For Jerzy Dobrowolski, Head of Valuation at Cushman & Wakefield Healey & Baker, the answer to the question is a simple one. ,Valuation always has been and always will be more of an art than a science, in the established market as well as here in Poland. A lot of valuers in this country are engineers so they think in terms of mathematics. When I approach a property to be valued, I approach it as an artist. It is impossible to use complicated statistical digression methods in a market as complex, illiquid and inhomogeneous as the real estate market, irrespective if it is a valuation of an office block or a third generation shopping centre. The computer programmes that valuers use is only a subordinated tool to present figures, which have to be regarded as speculative." So does that mean that two valuers would value the same building and get totally different results? "No. If both are professionals then they will get similar results because they both have the same rules and similar experience."
They say that if you get 2 Poles together, 3 different political opinions emerge. A similar thing, it seems, can be said for valuers when it comes to valuation.