PART 1: DEFINING AND UNDERSTANDING THE PROBLEM
AND THE CONSEQUENCES
Valuation of retail leases is increasingly inaccurate as industry moves away from substantive analysis. While simplification is partly understandable, the vast oversimplification that has occurred is disastrous for the retail sector, the economy, and the environment.
Current practice excludes from the retail lease valuation process every applicable valuation, economic, legal and accounting concept/analysis that contributes to consistent, robust and accurate valuations. Key concepts ignored include: ‘market value’, ‘effective rent’, ‘reasonable rent’; matching Supply & Demand (willing landlord/willing tenant); Contract Law (fully informed parties); auditing, accountability, business goodwill, and IFRS 16 guidelines.
Primary factors/problems contributing to this oversimplification include the:
1. Nature of the evidence: it is non-homogeneous in ways that make it difficult to compare;
2. Imbalance of information access and market power between landlords and tenants;
3. Differing levels of knowledge/skill of each valuer and conflicts of interest; and
4. Lack of analysis tools incorporating structured methods and built-in checks/balances to
overcome problems 1-3.
Using actual case studies, this paper describes several (typical) flawed valuations and explores how the first retail lease analysis product in the world uses a ‘Body of Evidence’ approach and multiple analysis methods to overcome these problems.
