Dominant and non-dominant lease structures and their effect on place-based valuation practices

Abstract

Purpose - This paper aims to examine the experiences of valuers when valuing market dominant and non-dominant standard lease structures. The research compares the perceptions and approaches of New Zealand valuers when valuing gross and net leases, two standard lease types commonly utilised in the New Zealand commercial property market. Design/methodology/approach - The study employs a structured survey of 87 commercial valuers practising in Auckland (where net leases dominate) and Wellington (where gross leases dominate)complemented by in-depth interviews with senior commercial valuers employed by large national/international multidisciplinary and real estate companies. Findings - The results suggest that valuers find the process of valuing standard non-dominant lease structures more demanding than valuing dominant leases and tend to be comparatively less confident about carrying out valuations of leases with which they are less familiar. This lack of confidence tends to result from the lack of comparable evidence and the added complexity of the valuation process requiring additional valuer expertise and judgement. In addition the study uncovers the adoption of place-based differential valuation practices. that have built up over time between the two centres under study. Originality/value - The paper contributes to the literature relating to valuer behaviour by revealing that even within one country with the same rules and professional standards different valuation practices may evolve. This study specifically identifies different dominant lease structures as being one of the reasons for these differential valuation practices. The findings also highlight the difficulties perceived by valuers when valuing non-dominant leases and in turn this may have implications when comparing the valuation outcomes of similar buildings within different markets. Keywords - Commercial property valuation, Commercial property, Valuation behaviour, Alternative lease structures, New Zealand, Asset valuation.