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Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012

Did Institutional Investors Bias Portfolio Appraisals during the Market Downturn? Evidence from the UK. Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012. Motivations. Do Clients Influence “Independent Appraisers”? Finance Literature on Client Effects

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Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012

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  1. Did Institutional Investors Bias Portfolio Appraisals during the Market Downturn? Evidence from the UK Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012

  2. Motivations • Do Clients Influence “Independent Appraisers”? • Finance Literature on Client Effects • e.g. Literature on Audit Results and Company Influence • e.g. Literature on Credit Rating Agencies and Issuers • E.g. Literature on Equity Analysts’ Advice & Client Groups • Real Estate Literature on Appraisal Effects • Typically Experimental, Interview or Survey Based • What Evidence Does Market Downturn Provide? • How Do UK Valuers Behave When the Market Turns? • Develop Crosby, Lizieri, McAllister (2010)

  3. A Conceptual Framework

  4. Client Influence on Appraisals: Prior Real Estate Research • A Sensitive Topic – Raising Ethical, Reputational, Negligence and Criminal Issues • Questionnaire Based Research • e.g. Smolen and Hambleton, (1997), Worzala, Lenk and Kinnard (1998), Gallimore and Wolverton (2000), Yu (2002) • Interview Based Research • e.g. Levy and Schuck (2005), Baum et al. (2000), Crosby et al. (2004) • Experimental Research • e.g. Hansz (2000), Diaz and Hansz (2001), Amidu et al. (2008)

  5. Some Context: The UK Market Correction

  6. Some Context: The UK Market Correction

  7. Some Context: UK CRE Unit Trust Redemptions

  8. Differences in Motivation • Unit Trusts • Redemption Based on Declared Net Asset Values • Selling into a Falling Market • Protecting Existing Unit Holders versus Exiters • Incentive to Mark Values Down … • Closed End Funds / Listed Funds • Geared Funds • Performance Incentives • Loan to Value Covenants and Lenders • Incentives to Mark Values Up … • But Valuers Are Independent, Arm’s Length • A Natural Experiment …

  9. Crosby, Lizieri & McAllister (2010) • Do Open Ended Funds Exhibit Different Performance Over the Market Turn? • Attempt to Correct for Fund Composition • But Only Aggregate Information Available • Information on Overall Fund Performance • Attempt to Correct for Broad Fund Holdings • Evidence Supportive a Client Influence Effect • Open Ended Funds Fall 2.5% More than “Expected”

  10. The Current Project • Focus on Individual Property Appraisals • Data from Investment Property Databank • ~ 12,000 Individual Property Records • Capital Value and CV Changes Over Market Correction • Sector and Geography Attributes, Yields • Size, Tenancy Details, Lease, Vacancy etc. • Ownership: Fund Type • Aim: Hedonic Model of Value / Value Change • Seek to Explain Differential Movement in Values • Does Fund Type Matter?

  11. Preliminary Results • Initial Analysis: Test the CLM (2010) Results • 6,700 Records with Capital Value Changes Q3 2007 • Include Cumulative Growth to Previous Quarter • Analyse by • Quarter Q3 2007 to Q4 2008 • Half Year H2 2007 to H2 2008 • Cumulative to Q3 2008, Q4 2008

  12. The Geek Bit • Variety of Models and Specifications Tested • OLS with Heteroscedasticity Robust Standard Errors • Test for Multicollinearity • VIFs Acceptable • Outliers and Extreme Values • Winsorize the Dependent Variable at 0.5% and 99.5% • Choice of Reference Segment and Fund • For PAS use “Other” Segment • For Fund Type, Model both “Other” and “Insurance Co.” • Examine Models with OEF dummy alone

  13. Quarterly Cross-Sectional Results Controls: log Cap Val, Yield, Market Segment, Cumulative Prior Dcv(-t) Winsorized Dependent Variable Heteroscedastic Robust Standard Errors

  14. Another Look at Q4 … • Redemptions were high in Q4 2007 • Positive sign unexpected? • Add Further Controls • Geography/region rather than PAS segments • “Quality” variables – yield relative, unexpired lease, ERV psf • Compromise … missing variables reduce sample size

  15. Half Yearly Results

  16. Cumulative Capital Value Shift to Q4 2008

  17. Summary and Next Steps • Are Appraisals Independent of Client Effects? • Market Downturn Forms Natural Experiment Due to Differences in Motivations By Fund Types • Results Consistent With Client Effect in Valuations • Could Still Be Information or Composition Issue • Were Open Ended Funds Forced to Sell? • Need to Improve Hedonics and Diagnostics • Include More Explanatory Attributes • Continue Robustness Tests, Improve Specification • Map Results Onto Other Variables • What Happens to REIT NAV Discounts?

  18. Did Institutional Investors Bias Portfolio Appraisals during the Market Downturn? Evidence from the UK Neil Crosby, Colin Lizieri, Pat McAllister & Yarim Shamsam ERES 2012

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