1. Changing Investment Valuation Practices in the UK Neil Crosby 1 and John Henneberry 2 1 School of Real Estate & Planning, University of Reading, Whiteknights, Reading, RG6 6UD, UK f.n.crosby@rdg.ac.uk 2 Department of Town & Regional Planning, University of Sheffield, Western Bank, Sheffield, S10 2TN, UK j.henneberry@sheffield.ac.uk f.n.crosby@rdg.ac.uk j.henneberry@sheffield.ac.uk European Real Estate Society Annual Conference Milan, 23-26 June 2010

2. Institutional Economics Markets are made up of systems or structured processes of interaction, constituted of rules and relations, habits and practices. Markets reflect and help to operationalise the institutional structure of the wider society in which they are set. They embody the prevailing distribution of power and interests and act as systems of social control.

3. Markets as sets of practices Material practices operate and constitute markets and economies. Logics underpinning practices (such as valuations) will affect economic form. Current economic form is contingent upon the outcome of interactions between competing logics.

4. Calculative Relations Wider Economic Domain Rationale / Objective of Calculation Technologies of Calculation After Miller (1994)

5. Calculative Relations Free Market Capitalism Maximisation of Choice / Competition DCF analysis / NPV performance measure

6. Histories of Calculative Practices Orthodox business history: strives to legitimate existing structures and strategies as ‘inevitable’ and ‘logical’. Critical history: demonstrates the subject’s mutability in different contexts and its role as an ideological weapon in the struggle over resource distribution.

7. Changing Power Relations “norms of calculation can … be seen as always potentially threatened by the existence of alternative and competing norms.” (Miller 1994, p. 13)

8. The Organisation of Calculative Practices Organising vehicles are: Higher education (business schools), firms and professions. Need to stress: The fluid and mobile nature of curricula, business activities and professional bodies of knowledge. No more than the current assemblage of (calculative) practices and rationales, invented in other contexts for other purposes. Marginal practices become central and vice versa. So history is important.

9. Research Methodology Historical method: identification, analysis and interpretation of sources … To produce a history (not the history), consistent with theoretical standpoint (cultural economy). Hypotheses: (i) that the calculative practices of finance capital (DCF) have become the norm in real estate; and (ii) that the sector’s business, education and professional organisations have acted in concert to support this change.

10. Research Method Lépinay's (2002) model of change Formulation: ill-defined; one of a host of potential new calculative technologies. Formula: greater credibility, acceptance and support; still threatened by competing approaches. Formalism: fully defined and stabilised; performance may be tested; easier to defend. Form: fully established; maintains and is maintained by its environment; defended from a position of strength.

11. Development of Technique in UK Property Investment Market Trott (1980) and Sykes (1983) suggested little change in technique in the 20 th Century. “For many decades the conventional methods of investment valuation were accepted as logical, practical and seemingly immutable” (Trott, 1980). In response, Crosby (1985) looked in more detail at the development of technique from the turn of the 20th century.

12. Findings up to mid 1980s #1 Based on review of texts, papers, cases and the historic records of an urban practice in Nottingham, Crosby (1985) found: – Subtle changes throughout the period – Change started from commentaries in texts, papers, etc suggesting rationale for amendment of technique, – In investment valuation, changes to “technology” facilitated adoption in practice.

13. Findings up to mid 1980s #2 However, the basic model remained unchanged despite the sea change in investor perceptions in the 1950/1960s (with perceived inflation, the basic model went from an assessment of expected cash flow to a growth implicit cap rate model) Throughout the period the discount rate/cap rate was a product of transaction analysis, not determined from first principles. No evidence of the impact of major downturns on practice from the 1930s but in 1970 the adoption of horizontal rather than vertical slicing of existing cash flows and upwards only rent reviews seemed to stem from counter inflation measures of the 1970s.

14. Development of cash flow #1 Changing ownership patterns in the 1960s and 1970s led to scrutiny of technique and suggested cash flow based alternatives by academics and analysts from outside traditional property background (e.g. Wood, 1972; Greaves, 1972, Marshall, 1976; Frazer, 1977; Walls, 1977). Basic texts slow to follow. No evidence of significant impact on practice pre- 1990 (Crosby, 1990)

15. Development of cash flow #2 Post 1990 downturn, more practice interest in cash flow based solutions (e.g. Martin, 1991; Rich, 1992; Goodchild, 1992; Epstein, 1993) French (1996) suggests cash flow more influential than in previous 1990 survey for MV. During 1990s cash flow institutionalised in RICS Red Book and the “Calculation of Worth” Paper from RICS/IPF (1996) Evidence that cash flow adopted by major practice for the analysis of price by 2000 (Baum, et al, 2000).

16. Conclusions #1 Things are more complicated and less neat than hypothesised (not unsurprising, when you study the messy real world). There is evidence to support the gradual development and establishment of cash flow approaches as a formalism – possibly form. But this does not amount to predominance/hegemony over the property sector. Limited to a being the norm in investment appraisal, the part of property ‘nearest’ to finance capital.

17. Conclusions #2 The history was unable to identify the relative importance of the influence of business/practice, education/academics and the profession in the rise of DCF. It is clear that there is significant resistance to the use of DCF in the estimation of market value Have established that the application of historical method to the study of valuation provides new insights into property.