Harmonization of Investment Valuation Standards in Europe

Article excerpt

Abstract

The harmonization of valuation standards in Europe is attracting increasing interest from several sources, but little empirical research has been undertaken on the subject. This study reports the findings of an investigation across four European countries. The focus is placed upon arguments relating to the possible implementation of harmonized standards, a comparison of national standards and an evaluation of The European Group of Valuation Associations (TEGOVA) standards. The findings show that the harmonization of valuation standards has been limited by lack of awareness and the reluctance of valuers to use standards other than their own national standards. The importance of the harmonization process is discussed along with the need for TEGOVA to take a more proactive role of promoting the use of common standards.

Introduction

Land and buildings are amongst the most important assets of a country. The Economic Intelligence Unit (1997) has emphasized that real estate forms an increasingly significant part of cross border direct investment. It is in the public interest, and in the interest of valuers and appraisers that the pricing of real estate is carried out reliably, consistently and transparently throughout the world. Lack of knowledge of valuation techniques can represent a barrier to entering markets as appraisal of real estate represents a key component in the assessment of risk. Business expansion across borders creates the need for consistent valuation systems for accounting purposes. This is recognized by the introduction of unified rules for the valuation of insurance company portfolios enabling meaningful cross-border comparison of performance (Downie, 1995).

Valuers and financial reporters are bound by their professional bodies to work within the standards that apply in their jurisdiction. In this respect, standard setting is a dynamic international process. The function of the valuation standard is to establish a foundation for sound practice to ensure compliance within the financial reporting regulatory framework. It is the valuation standard setters' role to debate technical and consequential issues, both within the valuation industry and the wider financial environment. As users of property valuations become increasingly international, there is a growing need for the harmonization of valuation practice and internationally accepted valuation standards.

Although studies exist that concentrate on valuation standards and practices in individual countries (Bruhl, 1997; Downie, 1995; and Downie, Adair, McGreal and Vos, 1996) very little analysis has been carried out comparing these issues on a cross national basis within Europe using a common set of research tools to investigate each country. This study attempts to bridge the knowledge gap and in particular to analyze the extent to which the harmonization of valuation standards has developed within France, Germany, Sweden and the Netherlands by focusing on three key issues. First, valuer awareness and the perceived importance of the harmonization debate are discussed. second, the factors acting as a stimulus for and against the harmonization of valuation standards in Europe are analyzed. Third, possible implications of adopting The European Group of Valuation Associations (TEGOVA, 2000) standards are examined, in particular their ability to overcome valuation variation and whether they should replace existing national standards. The research questions at the heart of these issues are assessment of the drivers for change and the extent to which national valuers pay cognizance to the TEGOVA standards.

Harmonization of Standards

In the real estate discipline, Diaz (2000) considers that less information is known than is currently required. This contention is particularly pertinent to the harmonization of valuation standards in Europe despite the importance of this process. This debate originated with the publication of the Approved European Valuation Standards, originally known as the 'Guide Bleu' or the Blue book and the role of valuation standards within national contexts has been the subsequent focus of a number of studies (Dunckley, 2000; Brühl, 2002; and Thorne, 2002). …