From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘RICS

International Financial Reporting Standards

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I know I’m sounding like an overly technical geek on these subjects, but as we know from the recent (current?) economic malaise, seemingly back-page issues can have major impacts on large segments of the economy.

Buried deep inside Friday’s issue of the Wall Street Journal (OK, page C1, but that’s pretty deep) was news that the SEC will once again delay implementation of the International Financial Reporting Standards (“IFRS”) for U.S. regulated businesses (from a practical standpoint, essentially all of them).  For those who aren’t up on their accounting theory, U.S. accounting standards — generally referred to as “Generally Accepted Accounting Practices” or “GAAP” for short — have been developed over time from essentially three sources:  “best practices” which have evolved literally over the centuries, pronouncements of the Financial Accounting Standards Board, or “FASB”, and its predecessors, and adaptations to conform with U.S. tax practice.  IFSR is more of a top-down approach, and governs accounting practices pretty much anywhere in the developed world EXCEPT for the U.S.   (One might argue, and with some validity, that recent accounting problems among Chinese businesses reveal real problem with IFRS compliance, and one wouldn’t be altogether wrong.  That’s a topic for a different day, though.)

American businesses dealing in global commerce (as nearly all big ones do, now-a-days) have been anxious for a unifying accounting paradigm for many years.  Indeed, the differences between IFRS and GAAP are significant, and in fact adoption of IFRS in the U.S. may cost many businesses quite a bit in tax penalties, since IFRS doesn’t recognize certain tax avoidance strategies (e.g. — last-in-first-out inventory accounting) that are common in the U.S.  Nonetheless, American businesses are willing to suffer the tax pain in order to get a common accounting language globally.

From an accounting perspective, this delay by the SEC is a royal pain in the neck, but that too is a topic for another day.  The reason I bring it up today is the implicit impact on real estate appraisal standards.  I’ve noted, with some interest, that appraisal standards are increasingly derivative of accounting practices.  Back when America’s Uniform Standards of Professional Appraisal Practice (“USPAP”) was developed, accountants could barely care about appraisal standards.  Today, a close examination of the International Valuation Standards Council (IVS) reveals a substantial degree of input from the accounting and banking fields, much more than we saw 25-ish years ago when USPAP was first codified.

In my own observation, this SEC delay gives the appraisal profession another year or so to decide if they want a top-down or bottoms-up approach to appraisal standards in the U.S.  Do appraisers want to be driving the truck or riding in the back?  I’ve observed that the three constituent “regulatory” bodies (the professional organizations, such as the Appraisal Institute and RICS, the Appraisal Foundation, and the state and federal regulators) seem to be of three different minds on the subject.  The constituent bodies seem to be more proactive and ready to move forward with IVS adoption.  The Foundation seems to have been constantly playing damage control in the past couple of years over the mortgage market meltdown and the resultant sturm-and-drang from the Federal regulatory bodies.  None of those regulatory bodies seemed to have a dog in this hunt, so haven’t appeared to care.  I will say, however, that proposed changes to USPAP 2014, which are currently being circulated in draft form, are very forward-looking, albeit with baby steps.

Finally, state regulators are almost 100% reactive.  Some are very good at reacting, and some are very bad.  Currently, they are all overwhelmed with the double-whammy of very real budget cuts and very real appraisal standards violations problems emanating from the mortgage market meltdown.  As such, a major paradigm shift in appraisal standards will be difficult for them to swallow.

This all seems to be back-page stuff, but in fact these issues have very real implications for the way “business does business”, particularly in the real estate valuation world.  We’ll keep you posted.

Written by johnkilpatrick

July 8, 2012 at 4:43 am

American Real Estate Society annual meetings

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ARES is one of the two primary real estate academic organizations in the U.S.  (The other is the American Real Estate and Urban Economics Association, “AREUEA”).  While most real estate academics are members of both, ARES also attracts a significant number of practitioners (typically ex-professors who are now in the consulting or investments business) plus has a great relationship with such practitioner organizations as the Appraisal Institute and the Royal institution of Chartered Surveyors.  ARES publishes several of the top real estate academic journals, including the Journal of Real Estate Research (for which I’m a reviewer), the Journal of Real Estate Literature, the Journal of Real Estate Practice and Education, the Journal of Real Estate Portfolio Management, the Journal of Housing Research, and the Journal of Sustainable Real Estate (for which I’m on the editorial board).

ARES holds its annual meeting in April, usually in a coastal city on alternating sides of the US.  This year’s meeting was last week at St. Pete Beach, Florida (an island just off the St. Petersburg coast), and we believe we set a record for attendance at a real estate academic conference.  Several hundred working papers and panel presentations dominated the program, along with sessions featuring research from doctoral students, and a well-attended, day-long “Critical Issues Seminar” on Wednesday co-sponsored by the Appraisal Institute and the CCIM Institute.

I presented papers in sessions, including one I chaired (“Real Estate Cycles”) and participated in an excellent panel discussion on Friday on “Real Estate Failure”, chaired by my good friend Dr. Gordon Brown of Space Analytics (and featuring Dr. Larry Wofford of U. Tulsa, Dr. Richard Peiser of Harvard, and myself).

I’m still digesting the huge volume of intellectual content that came out of ARES, and I’ll probably discuss some of these papers in future blog posts.  More later!

Canada looking more like the US and UK?

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The books are still being written on the causes and effects of the recent recession, but one wide-spread agreement is that aggregate household debt, and particularly the ratio of debt to household income, has been a real problem for developed nations.  In the U.S., this ratio hit between 1.6 and 1.7 at the onset of the recession, and then fell to about 1.4 today.  In the U.K., the ratio topped out at just under 1.6 in late 2007, and is now down under 1.5.  Given the flat-lining of household incomes in the two countries, this constitutes a very significant pay-down in household debt.  Note that for most of the 1990’s, this ratio hovered between 1.0 and 1.1 in the U.S., and between 0.9 and 1.0 in the U.K.  It wasn’t until the easy money period of the late 1990’s that these ratios started soaring.  (In the U.S., this was a gradual rise, really starting about 1990.  In the U.K., the rise was more abrupt, beginning about 2001.)

Now we har that our neighbors to the north are trying to copy our bad behaviors.  In 1990, the typical Canadian household had a debt/income ratio of about 0.9.  This gradually rose to about 1.1 by the late 1990’s, then hovered there for a few years.  Over the past 10 years, the Canadian debt ratio has continuously grown, with no “peak” in the early days of the recession, and now sits at about 1.5.

courtesy RICS Global Real Estate Weekly

Canada, interestingly enough, did not have the great depth and breadth of recession that roiled the U.S. and Europe.  While they had a brief period of negative GDP growth in early to mid 2009 (remember — two consecutive quarters of negative GDP growth defines a recession), their recession was both brief and shallow, and was followed by very positive numbers — their 2010 GDP growth rate got as high as 3.6% on an annualized basis, and continues strong today.
That having been said, Canada hasn’t been a powerhouse of economic growth since the early 1960’s, and many pundits suggest that Canada’s relative health during the past few years is a direct result of the fiscal conservatism of both their institutions as well as their citizens.  However, there are some faint storm clouds on the northern horizon.  Vancouver, BC, housing prices have been booming and some analysts suggest they’re in for either a fall or at least a fizzle.  Watching the Canadian household debt ratio get up to levels that the U.S. and the U.K. have found to be unsustainable and unhealthy isn’t very comforting.

Written by johnkilpatrick

February 16, 2012 at 10:02 am

Posted in Economy, Finance, Real Estate

Tagged with , ,

Global R.E. Perspective

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The Royal Institution of Chartered Surveyors (RICS, for short), with over 100,000 members throughout the world, is the largest real estate organization of its type.  Their quarterly Global Property Survey gives a great snap-shot into the world-wide investment market.  (Full disclosure — I’m a Fellow of the RICS Faculty of Valuation, and a contributor to this survey.)

The headline really captures the big picture — Weaker economic picture takes its toll on real estate sentiment.  Not every region feels the same pain — Canada, Brazil, Russia, China, and others continue to buck the trend and record positive net balance readings.    Nonetheless, in some of the most economically significant regions, at least from an investment perspective, expectations continue to be weak.  Obvious problem areas are the troubled spots in the Euro zone, but negative expectations are also reported in the U.S., India, Singapore, the U.K., Scandinavia, and Switzerland (among others).  However, despite a weak real estate market, investment demand is expected to grow in the U.S. and even in the Republic of Ireland, which is one of the Euro trouble-spots.  China, despite value-growth expectations, is among the weakest regions of those expecting positive investment growth, behind South Africa in total investment expectations.

One of the more telling studies compares expectations of demand for commercial space and expectations of available space.   Among major markets, only Canada, Poland, Russia, and Hong Kong expect meaningful decreases in supply coupled with increases in demand.  Not unexpectedly, most of the trouble-spots reflect increases in supply significantly outstripping increases in demand,  with the most notable gaps expected in the UAE, the Euro trouble spots (plus, interestingly, the Netherlands, France, Scandinavia, and Switzerland), India, and the U.K.  Expectations for the U.S., China, Brazil, Hungary, Japan, and Thailand all appear healthy, with increases in demand expected to exceed increases in supply.

The survey is available on the RICS website, which you can access by clicking here.

Written by johnkilpatrick

January 30, 2012 at 10:10 am

Housing redux

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While I’m on the subject, the Royal Instition of Chartered Surveyors (RICS), of which I’m a Fellow, publishes a great . Last week’s edition had a piece on the U.S. housing market doldrums, with a particular emphasis on the dearth of mortgage purchases (the secondary market which is vital to the liquidity of the mortgage business).

As you might guess, this important segment of the market peaked in 2005/6, and with a brief attempt at pick-up in early 2008, has been on a downward slide ever since. The index currently stands more than 60% down from the peaks of just 5 years ago. The trend continues downward, and fell 3.5% in the third quarter of this year.

Mortgage Purchase Index

They note that residential investment as a percentage of GDP currently stands at 2.2%, down from pre-recession levels of 6.6%. What’s more, the excess supply overhang will take years to absorb, according to their analysis.

The health — or lack thereof — us currently a front-burner issue for the Federal Reserve, which is now looking at the mortgage bond market as a means of helping to stimulate this anemic sector. Both FRB member Daniel Turillo and Vice Chair Janet Yellen have made public pronouncements in that direction recently.

Written by johnkilpatrick

November 8, 2011 at 1:35 pm

Posted in Finance, Real Estate

Tagged with ,

Global and Local Data

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Two important economic research pieces hit our desks this week — the RICS Global Commercial Property Survey, and the Dr. Bill Conerly’s Businomics Newsletter. The former, as its name implies, has a very global reach (the U.S. included), and gives a great basis for comparison of how the U.S. commercial real estate economy is doing relative to other economies. Naturally, this begs the question, “Are there OTHER economies?” From an investment perspective, all “economies” are integrated, and while each occupies a different place on the risk/reward graph, they are all viewed through the same lens by the equity and debt markets. Dr. Conerly’s work focuses narrowly on the Pacific Northwest, and gives us a great snapshot on how our local economy is doing. It’s a “must-do” resource piece for any work we do in our backyard.

RICS, of course, stands for Royal Institution of Chartered Surveyors. First charted by Queen Victoria in 1881, it is now the world’s oldest and largest property-focused organization, with 100,000 professional members and 50,000 students in 140 countries. Greenfield has been pleased to be affiliated with RICS here in the U.S. for quite a few years.

The headlines speak for themselves:

  • The strongest real estate markets are in Asia (except Japan) and Latin America
  • Emerging European Markets are seeing further improvements
  • Rental outlook turned positive in the U.S., deteriorated in the U.K, peripheral Europe, Japan, and the UAE
  • Capital market expectations are rising in China, Hong Kong, Poland, and India
  • from RICS Global Commericial Real Estate Survey 1Q2011

    For your own copy of the report, or one of the regional reports, visit the RICS web site by clicking <here>

    Dr. Bill Conerly, based out of the Portland, Oregon, area, is a great friend of ours here at Greenfield and one of the region’s top consulting economists. His newsletter presents key national economic trends (along with his pithy comments) and then focuses on how these play out in the Pacific Northwest. He calls national GDP growth since the start of the recovery “disappointing”, and notes that while consumers seem to be rebounding and business equipment capital spending is growing moderately, construction spending is still “weak”. Housing starts are still troubling (for more on this, see some of my prior blogs on the housing market) and despite gas prices, inflation still seems to be under control (actually near the lowest levels in the past 5 years.) The spread of junk-bond yields over treasuries hit a peak of nearly 2000 basis points in 1009, and is back down to between 500 and 1000, but still above the roughly 300 basis point level of 2007. Dr. Conerly suggests there is still some worry about risk, although I would posit that 700 or so basis points is probably a healthy level. Finally, on a national view, Dr. Conerly is looking for “decent but not dramatic gains” in the stock market.

    On the local front, Dr. Conerly notes that both Oregon and Washington bankruptcy filings have turned downward from their peak levels last year, although both are still well above levels pre-2009. Through the recession, both states have seen substantial net in-migration (Oregon at about half of Washington’s level), although Oregon’s in-migration had trended slightly downward and Washington’s slightly upward.

    For more information on Dr. Bill Conerly or copies of his charts, visit him here.

    Written by johnkilpatrick

    May 12, 2011 at 9:16 am

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