Dominant and non‐dominant lease structures and their effect on place‐based valuation practices
| DOI | https://doi.org/10.1108/14635781111171760 |
| Published date | 27 September 2011 |
| Date | 27 September 2011 |
| Pages | 595-611 |
| Author | Dulani Halvitigala,Laurence Murphy,Deborah Levy |
| Subject Matter | Property management & built environment |
Dominant and non-dominant
lease structures and their effect
on place-based valuation
practices
Dulani Halvitigala
Department of Construction, Unitec New Zealand, Auckland, New Zealand, and
Laurence Murphy and Deborah Levy
Department of Property, The University of Auckland Business School,
Auckland, New Zealand
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 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 propertyvaluation, Commercial property, Valuation behaviour,
Alternative leasestructures, New Zealand, Asset valuation
Paper type Research paper
1. Introduction
Property research in recent years has sought to understand the impact of human
behaviour in property processes and has increasingly recognised its significance in the
determination of market prices (Daly et al., 2003; Diaz, 1999; Hardin, 1999; Leishman
and Watkins, 2004; Levy and Henry, 2003; Levy, 2005; Roberts and Henneberry, 2007).
Despite the growing diversity in lease structures, there is currently little empirical
research on valuer behaviour when valuing alternative lease structures, and how this
The current issue and full text archive of this journal is available at
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Dominant and
non-dominant
lease structures
595
Journal of Property Investment &
Finance
Vol. 29 No. 6, 2011
pp. 595-611
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781111171760
behaviour may be influenced by the specific market, individual perceptions, famili arity
and experience.
Within the context of increasingly dynamic and globalised markets, leases are
assuming a more varied and flexible character as the needs of affected parties change
(Parker and Robinson, 2000). Various covenants in leases shift the opportunities , risks
and responsibilities between the landlord and tenant and consequently have an impact
on income and capital returns. A number of authors have suggested that valuers’
understanding of the process and the valuation techniques used in practice is not
sufficient to accurately price variations across leases (Sirmans and Miller, 1997; Crosby
and Baum, 2007; Baum and Turner, 2004; Crosby and Murdoch, 1994; French, 1996;
French, 2001; Hutchison et al., 1996; Lizieri et al., 1997; Rowland, 1996; Rowland, 1999;
Rowland, 2000). Previous research has sought to verify through theoretical models the
effects of a number of lease covenants on rent (Rowland, 1999, 2000). These models,
however, focus on financial aspects of a lease and fail to reflect on the complexity of
valuation process and practices.
Most property submarkets consist of one dominant lease structure, with less
frequent lettings based on alternative lease forms (Rowland, 1996), this diversity places
pressure on traditional valuation models leading valuers to rely on practitioner
conventions incorporating heuristic (experienced based) rules of thumb (Seabrooke and
How, 2004) and subjective adjustments rather than approaches that rely on comparable
transactions (Lizieri et al., 1997). Lizieri et al. (1997) argue that non-standard leases are
shunned by investors, funders and developers due to valuation inefficiencies and
pricing difficulties which could result in a negative impact upon capital values (see also
Rowland, 2000; French, 2001).
This paper investigates the perception and practices of valuers when faced with these
pricing difficulties in the context of valuing standard New Zealand leases (net and gross)
within markets that are dominated by an alternative lease form. It focuses on two
distinct New Zealand office leasing markets; Auckland dominated by net leases and
Wellington by gross leases. In particular the following research questions are addressed:
.Do valuers perceive the valuation of market dominant lease structures
differently to valuing non-dominant lease structures?
.What issues, if any, do they asso ciate with the valuation proce ss of
non-dominant leases?
.How do valuers estimate the rental and market values of properties leased on
dominant and non-dominant leases?
The following section gives an overview of the study and reviews the existing
literature. The review highlights the importance of acquiring an in-depth
understanding of how different lease structures are valued in practice and the effect
of experience and familiarity on valuation processes. The methodology is then
presented followed by a summary of the results. The concluding section highlights the
key findings of the study and comments of the implications of these findings for
professional practice.
2. Context and literature review
The New Zealand commercial property market witnessed major changes in the late
1970s with the introduction of the net lease to a traditionally gross lease market. This
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