Revealing valuation in terms of quality behind the price veil: Insights from office markets within Europe
Résumé
Within a functioning market it is assumed that price should mirror the quality of a product: A high quality product gets a higher price than a low quality product. However, for real estate products one has to question this assumption.Real estate markets are nontransparent and properties are rather complex products. Thus the informational content of the price of a property will reflect rather scarcity then quality. Within a well-defined sub-segment of an office market similar properties are seen as substitutes for one another. Therefore the transaction price of one property is more influenced by the prices of the other properties than by detailed analyses of the quality of this specific property.For portfolio management a key task is to examine the value chain of each property and to determine potentials for improvements. Consequently, it is important to have a good assessment of the quality of a property in order to decide whether it will be worthwhile to invest in quality improvements. We developed a new approach and tested it for the French, German and UK real estate market. This methodology is directly based on the dimensions of the quality. We introduce a new approach where the levels of quality for each characteristic are judged by market participants themselves. More precisely, this approach consists in making explicit market quality judgments. In the first phase, a group of national market participants are asked to formulate overall quality judgements on buildings of the national office market. Then an econometric procedure is applied to identify what are the most valued characteristics.This approach allows different buildings to be positioned relatively to a benchmark and provide an alternative way to consider quality, i.e. the reference value of the building. Furthermore, a comparison between the three countries France, Germany and UK is possible. This approach also allows determining the impact of the “green" component of a property. Altogether, the paper highlights the need for a more comprehensive approach including all the dimensions of quality to define an valuation indicator of the "real value” of a building.