JÖ NKÖPING INTERNATIONAL BUSINESS SCHOOL JÖNKÖPING UNIVERSITY R e a l E s tat e A p p r a i s a l A Study of Real Estate Appraisers in Sweden Master of Science Thesis within Business Administration Author: Andersson, J. Fredrik Landberg, R. Robert Tutor: Magnus Hult, Econ Lic Examiner: Gunnar Wramsby Jönköping June 2005 JÖ NKÖPING INTERNATIONAL BUSINESS SCHOOL JÖNKÖPING UNIVERSITY Fastighetsvärdering En studie av fastighetsvärderare i Sverige Filosofie Magisteruppsats inom Företagsekonomi Författare: Andersson, J. Fredrik Landberg, R. Robert Handledare: Magnus Hult, Ekon Lic Examinator: Gunnar Wramsby Jönköping Juni 2005 Acknowledgements All along the work process with this Master of Science thesis we have achieved assistance, recommendations and comments from various helpful people. Fredrik and Robert feel privileged and glad for all contribution. We especially feel that there are some persons we gladly would like to give a special thank to. First, we would like to show our gratitude towards all the respondents that took the time to sit down and share their thoughts to us. The Swedish real estate appraisers that participated in our study were: Bengt Eriksson, Hans Hurtig, Åsa Håkansson, Hanna Lassing, Åsa Linder Modig, Sigvard Lundin, Bengt Norefalk, Karin Svensson and Hans Voksepp. To the professor Stellan Lundström at the Royal Institute of Technology (KTH) we would like to express special thanks to. Thanks to all of the respondents that made their contribution to our study and for allowing us to visit you and for providing us with many fascinating aspects during the interviews. We sincerely hope we have acted as good representatives and ambassadors for Jönköping International Business School. Our tutor Magnus Hult gave us few but relevant directions and tips how to proceed in our study. He delivers a controversial style together with deep abstract thoughts of how struc- ture and method really should be applied to achieve a consistent and understandable re- port. Fredrik J. Andersson Robert R. Landberg Jönköping, June 2005 Master of Science Thesis within Business Administration Title: Real Estate Appraisal: A study of real estate appraisers in Sweden Authors: Fredrik J. Andersson & Robert R. Landberg Tutor: Magnus Hult, Econ Lic Date: June 2005 Descriptors: Real estate, property, valuation, appraisal, valuer, appraiser Abstract Problem: The underlying problem within this Master of Science thesis is the emanating issues from the changed owner and usage situation of the former Tax Department. A planned reconstruction led to difficulties in estimating the reconstruction costs. In the end this problem is an appraisal is- sue. This problem led to an interest to make a thorough investigation of the area of Swedish real es- tate appraisal. The thesis is constituted by five different sub-investigations. Initially an exploration is made concerning Swedish real estate appraisal methods. Further, factors affecting the real estate value are examined. This is followed by an investigation of what appraisal issues that might occur in a new usage situation and how the value is estimated in such a situation. The relation between Swedish and International appraisal methods is then illuminated. The final investigation is concern- ing what new trends that have occurred on the Swedish real estate appraisal market. Purpose: The purpose of this Master of Science thesis is to study the phenomenon real estate ap- praisal via Swedish real estate appraisers to gain an understanding of how they reason when choos- ing appraisal method and determine the real estate value. Additionally, the aim is also to highlight the relation between Swedish and International real estate methods to reveal differences and simi- larities. Method: We have chosen a qualitative method taking the form of eight interviews. A total of eight interviews are performed. The study is offset by a pre-study with a professor at RIT, Stellan Lund- ström. The aim with this interview is to get an updated view of the latest research within real estate appraisal. This is followed by seven interviews with certified real estate appraisers. The results from the interviews with the appraisers are analysed together with the pre-study, theoretical framework and previous studies. The analysing process is based upon a modified thought model, originally de- veloped by the researcher Jan Mattsson. The analysing process is presented in five steps that all are connected to the modified thought model and related to the problem area of this Master of Science thesis. Conclusion: We found that the Swedish appraisal methods generally are constituted by three methods. These are the avkastnings method, the ortspris method and production cost method. The most influent factors on the real estate value are the location as well as the condition and standard. Also the rent contracts and vacancies to some extent affect the value. A rather large problem origi- nates in the estimation of future costs, where the estimation of reconstruction costs is referred to as the largest issue. The international appraisal methods are equivalent to the Swedish methods. The largest differences are of cultural kind mostly caused by differences in legislation. New trends that are presented are the impact of the international accounting standards (IAS). Another significant trend is the increased use of automatic real estate analysis tools. Magisteruppsats inom Företagsekonomi Titel: Fastighetsvärdering: En studie av fastighetsvärderare i Sverige Författare: Fredrik J. Andersson & Robert. R. Landberg Handledare: Magnus Hult, Ekon Lic Datum: Juni 2005 Ämnesord: Fastighet, värdering, värderare Sammanfattning Problem: Problemet som legat till grund för intresset och inriktningen med denna magisteruppsats är då tidigare kontorsfastigheten Skatteskrapan skulle byta ägare och användningsområde. En pla- nerad ombyggnad ställde till problem med avseende på uppskattningen av ombyggnadskostnader. I slutändan handlar problemet om ett värderingsproblem. Detta problem tillsammans med andra ex- empel där fastigheter bytt användningsområden har väckt ett intresse att göra en ingående under- sökning av det svenska fastighetsvärderingsområdet. Denna uppsats är indelad i fem olika delunder- sökningar. Initialt sker en presentation av svenska metoder för fastighetsvärdering. Vidare under- söks olika faktorer som har olika värdepåverkande effekter på fastighetsvärdet. Därefter genomförs en undersökning av hur nya användningssituationer kan vålla värderingsproblem samt hur ett värde fastställs i en sådan situation. Nästa steg består utav en undersökning av internationella värderings- metoder. Studien avslutas sedan med en undersökning av nya trender som utvecklats inom fastig- hetsvärderingen. Syfte: Syftet med denna magisteruppsats är att studera fenomenet fastighetsvärdering via svenska fastighetsvärderare för att erhålla en förståelse för hur de resonerar vid valet av värderingsmetod och bestämmer det slutliga värdet. Dessutom är syftet också att belysa relationen mellan svenska och internationella värderingsmetoder för att utröna likheter och skillnader. Metod: Vi har valt en kvalitativ metod i form av åtta intervjuer. En förstudie, i form av en intervju, görs med professor Stellan Lundström, vilken ämnar till att ge en uppdaterad bild av forskningen inom området. Därefter hålls sju intervjuer med auktoriserade fastighetsvärderare. Värderarnas syn- punkter analyseras sedan tillsammans med resultat från förstudien, teoretiskt ramverk samt tidigare studier. Analysen är baserad på en modifierad tankemodell som är skapad av forskaren Jan Matts- son. Genom denna modell har sedan fem viktiga nivåer, knutna till uppsatsens problemområde, analyserats. Slutsats: Vi fann att de svenska värderingsmetoderna i stort sett utgörs av tre olika metoder. Dessa är avkastningsmetod, ortsprismetod samt produktionskostnadsmetod. De viktigaste värdepåver- kande faktorerna var fastighetens läge samt dess skick och standard. Även hyreskontrakten och vakanser påverker till stor del. Beslut om ny användningssituation kan tas av olika anledningar. Det största problemet relaterat till denna förändring är uppskattningen av framtida kostnader, där om- byggnadskostnader utgör den största svårigheten. De internationella värderingsmetoderna är över- lag de samma som de svenska. Kulturella skillnader föreligger i vilka metoder som används i olika situationer. De viktigaste nya trenderna är effekten av de internationella redovisningsstandarderna. En annan trend är det ökade användandet av automatiska analysverktyg. Introduction Table of Contents 1 Introduction............................................................................ 4 1.1 Background................................................................................... 4 1.2 What type of problem do the report cover?................................... 5 1.3 Who is concerned with the problem?............................................ 6 1.4 Participants in the real estate market............................................ 6 1.5 Limitations of the problem area..................................................... 7 1.6 Problem we intend to solve in this thesis....................................... 8 1.7 Summing up: Our problem questions............................................ 9 1.8 Purpose....................................................................................... 10 1.9 Definitions ................................................................................... 10 1.10 Disposition................................................................................... 12 2 Scientific Theory.................................................................. 13 2.1 Scientific approach...................................................................... 13 2.2 Subjectivism and Objectivism...................................................... 13 2.3 Popper, Kuhn and Gadamer ....................................................... 14 2.4 Deductive approach.................................................................... 15 2.5 The procedure of the study ......................................................... 16 3 Method.................................................................................. 19 3.1 Methodological approach............................................................ 19 3.1.1 Type of study approach.................................................... 19 3.1.2 Qualitative method............................................................ 20 3.1.3 Literature study................................................................. 21 3.1.4 Four different types of theory............................................ 22 3.1.5 Primary and secondary data............................................. 23 3.1.6 Stories as data.................................................................. 24 3.2 The Interviews............................................................................. 24 3.2.1 Sample ............................................................................. 25 3.2.2 Setting the sample restrictions.......................................... 25 3.2.3 The final sample............................................................... 27 3.2.4 Design of interview guide.................................................. 28 3.2.5 Data collection and data processing................................. 30 3.2.6 The analyzing process...................................................... 30 3.2.7 Mattsson’s simple thought model...................................... 30 4 Appraisal Framework.......................................................... 33 4.1 Swedish real estate appraisal methods....................................... 33 4.1.1 Real Estate submarkets.................................................... 33 4.1.2 Swedish Real Estate Methods.......................................... 34 4.1.3 The “Ortspris” method....................................................... 35 4.1.4 The “avkastnings” method................................................ 36 4.1.5 Production cost method.................................................... 37 4.1.6 Market simulation method................................................. 37 4.2 Factors affecting the real estate value......................................... 38 4.3 New usage situation causing valuation problems........................ 40 4.3.1 Definition of value............................................................. 40 1 Introduction 4.3.2 New usage situation......................................................... 41 4.4 International real estate appraisal methods................................. 43 4.4.1 Rules of thumb techniques............................................... 43 4.4.2 Ratio analysis................................................................... 44 4.4.3 Traditional valuation techniques....................................... 44 4.4.4 Discounted cash flow techniques...................................... 46 4.5 New trends within real estate appraisal....................................... 47 5 Pre-Study: Interview with Professor at KTH ..................... 49 5.1 Swedish real estate appraisal methods....................................... 49 5.2 Factors affecting the real estate value......................................... 50 5.3 New usage situation causing valuation problems........................ 51 5.4 International real estate appraisal methods................................. 52 5.5 New trends within real estate appraisal....................................... 53 6 Previous studies.................................................................. 54 6.1 Swedish real estate appraisal methods....................................... 54 6.2 Factors affecting the real estate value......................................... 58 6.3 New usage situation causing valuation problems........................ 61 6.4 International real estate appraisal methods................................. 63 6.5 New trends within real estate appraisal....................................... 65 7 Analysis................................................................................ 67 7.1 Swedish real estate appraisal methods....................................... 67 7.2 Factors affecting the real estate value......................................... 75 7.3 New usage situation causing valuation problems........................ 80 7.4 International real estate appraisal methods................................. 86 7.5 New trends within real estate appraisal....................................... 90 8 Conclusion and Final discussion....................................... 95 8.1 Conclusions................................................................................. 95 8.2 Final discussion........................................................................... 96 8.3 Suggestions for further research................................................. 97 8.4 Economic value of our study....................................................... 97 8.5 Method criticism.......................................................................... 98 8.5.1 Criticism on theoretical sources........................................ 98 8.5.2 Interview and sample criticism.......................................... 98 8.5.3 Validity.............................................................................. 99 8.5.4 Reliability.......................................................................... 99 Reference list........................................................................... 101 Appendix 1: Problem Questions............................................ 105 Appendix 2: Interview Guide Pre-Study................................ 106 Appendix 3: Interview Guide Main-Study ............................. 108 Appendix 4: Respondents...................................................... 110 2 Introduction Figures Figure 1:1. Participants in the real estate market........................................... 8 Figure 2:1. The process of the study; deductive approach........................... 17 Figure 3:1. Selection criteria for the final respondent sample....................... 27 Figure 3:2. A simple thought model by Mattsson (NUTEK, 1992, p.11)....... 31 Figure 3:3. Mattsson’s simple thought model modified to fit our study......... 32 Figure 7:1. Mattsson’s thought model modified to fit our study.................... 67 Figure 7:2. Mattsson’s modified thought model highlighting level one......... 68 Figure 7:3. Mattsson’s modified thought model highlighting level three....... 72 Figure 7:4. Methods used by the Swedish appraisers.................................. 75 Figure 7:5. Mattsson’s modified thought model highlighting level two.......... 76 Figure 7:6. Factors affecting the final real estate value................................ 79 Figure 7:7. Mattsson’s modified thought model highlighting level four......... 80 Figure 7:8. Mattsson’s modified thought model highlighting level five.......... 85 Figure 7:9. Swedish methods quivalent with foreign methods. .................... 90 Tabels Table 1:1. Type of problem our study investigate........................................... 5 Table 1:2. People concerned with the valuation problem of a new usage...... 6 Table 3:1 Four types of theory categories.................................................... 23 Table 6:1. Previous Studies: Appraisal Methods.......................................... 54 Table 6:2. Previous Studies: Appraisal Methods.......................................... 55 Table 6:3. Previous Studies: Factors affecting the value. ............................ 58 Table 6:4. Previous Studies: Factors affecting the value. ............................ 59 Table 6:5. Previous Studies: New Usage Situation...................................... 61 Table 6:6. Previous Studies: New Usage Situation...................................... 62 Table 6:7. Previous Studies: Foreign Valuation Methods............................. 63 Table 6:8. Previous Studies: Foreign Valuation Methods............................. 64 Table 7:1. Types of real estates the appraisers have experience from........ 70 Table 7:2. Empirical result of the methods used by Swedish appraisers. .... 73 Table 7:3. Empirical result of new usage causing valuation problems......... 84 Table 7:4. Empirical result of appraisers’ relation to international methods. 88 Table 7:5. Empirical result of new trends according to the appraisers......... 92 3 Introduction 1 Introduction The purpose with this introduction chapter is to explain the focus of the study where we provide a presenta- tion of the problem background to the chosen research subject that finally leads to our problems questions and the purpose of our study. 1.1 Background We will start this academic discussion with pointing out that there is a need for research within the chosen topic as the two following authors describe it: “Real estate valuation is not seen as any science, but the question therefore is if not research within the subject is justified.” (Persson, 1991, p.7) “As an academic subject area real estate enterprising and operation of real estates is a new field of research. Therefore, different approaches are searched for, primarily from the research areas within financial analysis and management. The research will apart from the theoretical framework lead to models.” (Professor Lundström, 1992, p.5) Even though these texts were written in the early 1990s, the research within the subject is obviously not sufficient since finding proper studies has been a tough challenge. However, the subject area about real estate valuation firstly caught our interest after reading in the daily newspaper Dagens Nyheter (2005-02-03) about new student residents in Stock- holm. The debate about transforming the usage of an old governmental building called Skatteskrapan, the former Tax Department, into rooms and apartments for University stu- dents caused some valuation issues. In the article (DN, 2005-02-03) accountants questioned the forecasted calculations for the project. They considered the expected reconstruction costs to be insufficient and further the forecasted rental incomes seemed optimistically large. All together, according to the ac- countants, this provided a questionable and untrustworthy measure of the price for the real estate. In another article in Dagens Nyheter (2003-11-26) there is a discussion that the municipal- ity in Stockholm wants to purchase the building called Skatteskrapan from the Government owned real estate company Vasakronan in order to transform it into a residence for stu- dents. The purchase deal would close around SEK 1,6 billion, including the purchase sum and rebuilding costs. Svenska Bostäder was chosen to be responsible for the project of turning Skatteskrapan into a residence for students. Dagens Nyheter (2003-11-30) claims that there is a disagreement about the total cost of re- building Skatteskrapan into a student residence. Two consultant companies were contacted in order to come up with the expected costs of the project. A consulting company named Bygganalys AB was first contacted for calculating the total cost of the project. According to their calculations the total cost was estimated to about SEK 1 billion. This was not accept- able according to the majority of politicians in the City Hall, since the figures were thought of as being too high. Instead the city hall of Stockholm contacted another Consultant Company named Carlbro AB. The conclusions drawn by Carlbro were that this kind of project would entail costs of about SEK 600 million. The major impact on the difference between the two estimations arose from costs concerning the contractor and the future proprietor. 4 Introduction Another large impact on the cost differences was whether or not there was a need for renovating the external wall of the real estate (DN, 2004-11-30). In the offer from Bygga- nalys AB, based on their drawn conclusion about the rebuilding cost, a renovation of the external wall was included in the final cost. This was not included in the cost estimation from Carlbro AB. Although the two consultant companies both agreed upon that the ex- ternal wall had to be renovated in the near future, Bygganalys AB suggested a renovation at the same time as the rebuilding will be carried out, while Carlbro AB believed the renova- tion could wait. However, Svenska Bostäder that will be responsible for the reconstruction preferred a renovation of the external wall as soon as possible. The board of Svenska Bostäder assumed that the latter calculation did not include costs for changing windows of Skatteskrapan, which alone is a project that would add about SEK 100 million to the earlier calculations of SEK 600 million. In the article (DN, 2004-11-30) the financial commis- sioner Annika Billström finally stressed that the increased costs will be even with the in- creased income coming from an augmented commercial area. Skatteskrapan was finally sold to Svenska Bostäder for SEK 566 million, including the re- construction rights (Vasakronan, 2005-04-03). We have noticed that there obviously is a valuation problem with real estate objects that face a new value based on changing to a new usage situation. Some examples of new usage of old real estates are, according to Hedskog (1991); when changing from military usage (A6, Jönköping) to shopping mall usage, changing from fire station (Brandtornet, Jönköping) to office usage, and changing from philanthropy usage to hotel usage (Comfort Hotel, Jönköping). 1.2 What type of problem do the report cover? The Appraisal Institute (2001, p.79) divide the real estate owner’s interest into different in- terest areas. Regardless of the type of ownership, partial interests together with the purpose of the appraisal assignment automatically lead to separate ways of viewing the valuation problem. According to the Appraisal Institute (2001, p. 80) these interest areas are: Table 1:1. Type of problem our study investigate. Economically Legally Physically Financially The economic interest The legal interest con- The physical interest The financial interest concerns the landlord’s cerns different legal concerns either inter- concerns investment and the tenant’s posi- rights, benefits or re- ests in horizontal or ver- practices related to debt tions and interests re- strictions that the owner tical division where the or equity components, lated to leasing fees posess as being the property is broken down or other financial ar- and contract rents. owner of a real estate. into smaller units. rangements such as capital markets. Our problem focus. The problem area we have chosen to focus on within our study is the problem area with the financial interest, as highlighted in table 1.1 above. The viewpoints that the real estate appraisers have when performing valuations affect the final real estate value. In its turn the final value of an real estate have an effect on, for ex- ample, the sales price of an real estate or the new usage value related to a reconstruction. Thus, the interest we have chosen to focus on concerns problems of a financial type. 5