Fog

Written by Teun van den Dries

Like a ship’s captain, trying to see as far across the horizon as possible and cursing the fog which hides his views of rocks and storms ahead, transparency is highly prized by property investors. Asset managers need to make judgement calls worth many millions of pounds based on the best information they have available; no-one has a crystal ball, but they’ll arm themselves with the best investment telescope they can get their hands on.

Property has stubbornly remained one of the most opaque asset classes, but in the current regulatory and financial climate, investment decisions must be fully auditable and open to scrutiny by shareholders, auditors and regulators.

So how has this opaqueness persisted?

The plain truth is that obfuscation suits some in the property market. For some owners of commercial real estate, having an instant and public value put on their property holding does not suit their business model, which is predicated on convincing buyers to pay as much as possible.

Photo Credit: Claudia Viloria

Our platform has, our clients tell us, increased the levels of transparency significantly. Indeed such is the level of transparency offered that a number of organizations have asked us to remove their portfolios from our platform since it was launched. This confirms that we are breaking new ground with our technology. It may be uncomfortable news for those who have got used to operating in the property fog, but an independent organization, using independently sourced data, is well placed to provide a clear overview right across the sector.

Currently the property market uses definitions like “Core, Core+ and Value-add” as euphemisms for an underlying assumption of the value of a property. This is a relative scale per portfolio, not an absolute scale for the market or for a country; because agents are trying to upsell, a majority of the market is given a positive rating, which makes this broad assessment worthless.

What property investors would like to see is an objective and uniform rating system for property quality, using data to create a universal score; this is what we believe we’ve achieved with our OfficeRank and RetailRank scores, our quality measure for commercial property.

Removing human judgement or interpretation is crucial to de-risking the property market for investors, and every building needs to be assessed using the same methods and data structure. In this way even if you overweigh certain elements there is still one international standard applied to all — and that’s invaluable for an asset manager who wants to be able to compare, benchmark and make a value judgement on property in different countries without having to do their own detailed research.

Controlling the flow of information about property businesses and portfolios is no longer an option; with greater transparency, marketing a portfolio will actually become a lot easier. However, marketing that portfolio as better than it actually is will become much harder. Measuring asset management and asset rotation over time will also enable investment funds to show their track records — alleviating risk from upstream investment and rewarding the most effective asset managers.

Transparency isn’t about driving down the value of a property portfolio, it’s about making clear the details to enable a fair price where neither party loses.

Openness should be the default position when it comes to real estate information, but the property industry has failed to produce the required level of open brokerage from within itself and the market has been crying out for an independent data feed, untainted by agents’ vested interests.

Bringing transparency to the property market is no easy feat, but the ultimate result is not in doubt; it is simply a matter of time and those who embrace the new era of transparency will see their businesses grow. Most of the current business models that thrive on opaqueness will not function well in a more open and transparent market; they will have to find their value-add elsewhere. The days of a foggy property market are numbered.

(Originally posted November 10, 2016 on geophy.com)