Interview: James Bauer, Managing Director, REAG - Five reasons to ...

REFIRE INTERVIEW:
Interview: James Bauer,
Managing Director, REAG
On the global landscape of national property markets, the German
commercial property market sticks out like a sore thumb for
the stability of the returns that it has produced over a
long period. This stability is extraordinary, given the
backdrop of such volatility in other world markets,
and has led to widespread scepticism about the veracity
and reliability of German property valuations.
What enables Germany to have such a smooth volatility
curve? Has the German open-ended funds industry
been using valuations to hide the true volatility
in performance measures?
In a recent paper on this subject, Professor Neil Crosby
of the UK’s University of Reading Business School
suggested strongly that, while no definitive conclusions can be
reached, evidence suggests that the true level of volatility in Germany
may have been smoothed over by both valuation policies
and the possibility of client influence over German valuers. While
stable property returns would be the likely logical outcome of a
political system which prizes a stable economic system and the
avoidance of boom-and-bust volatility, corporate and individual
investors increasingly place great store on establishing the actual
current ‘worth’ of a property asset, whether for purchase or for
sale. REFIRE went to discuss this with James Bauer, managing
director of REAG (Real Estate Advisory Group), the German
division of the privately-held American Appraisal group.
REAG specialises in providing real-estate services for incomeproducing
properties, mainly offices, hotels, managed-care
homes, logistics and retail. Bauer explains how his company’s
departments – including investment, valuation, property consulting,
and technical due diligence (including architects, engineers,
and chartered surveyors) work for their client – and highlights the
company’s Watchdog service, that ensures that new owners of
property are getting everything that they bought.
What makes REAG different from all the local and international
property advisors, with their extensive branch networks throughout
the country? “As an independent advisory and valuation
company, our clients don’t have to worry about conflicts of in-
terest”, says Bauer. “Any information remains confidential, and
is specific to the assignment. Our clients don’t have to worry
about Chinese walls between investment advisory and buying
and selling departments, clients don’t have to declare their
hand, particularly if they’re only considering selling a property.
We mostly work for investors themselves, and we’re frequently
charged with valuing properties where the investors don’t want it
known that they’re either searching or selling, particularly if they
want to sell before the property hits the market.”
Who are REAG’s major clients? “Actually, we work
right across the spectrum. The past two or three
years have seen a lot of foreign investors coming into
the market, with Germans mainly on the selling side.
We’ve been doing a lot of market feasibility studies for
clients looking to put together German portfolios. As a
result of the strengths in our parent group, we’ve been
working for a lot of investment banks from the US, the
UK, France, Scandinavia and Italy. The geographic
spread has probably been about 30/30/30 between
the US, the UK and Europe.”
This is in reference to REAG’s role as the real estate specialist
within the American Appraisal group, founded in 1896 in Milwaukee
as a valuation specialist and which has since followed
its clients worldwide to Europe, South America and Asia. The
group has built up expertise in valuation for mergers and acquisitions
in manufacturing companies, focusing on machinery and
equipment, and production real estate. Its operations in Italy,
its oldest European operation, are about to celebrate their 40th
anniversary.
We discuss the thorny issue of foreigner’s perceptions of traditional
German property valuations. In essence, the German understanding
of the term ‘valuation’ has traditionally been closer
to a conceptual assessment of worth, rather than the actual
price that could be obtained for a property if it were put on the
market now. What does Bauer think are the fundamental differences
in approach? “Well, theoretically, the final results should
be similar. International investors base their valuations on the
market value on the date of appraisal. German valuations are
based on sustainable rent, which is what caused the problems
for the Germans (open-ended funds) in 2001, 2002, 2003, in
that valuations were kept fairly high, although this no longer coincided
with the market as rents had dropped. The valuations
were saying that the rents were sustainable, although they had
fallen frequently by 30-40%. Most of the open ended funds got
into trouble as a result. Now the valuations and the market situ-
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