Martin Brühl is Chief Investment Officer and member of the Management Board at Union Investment Real Estate, the Hamburg based investor with €32bn AUM across 22 countries
We caught up with him to find out more about how Union uses valuation data and his thoughts on the future of the valuation profession.
Qu: Tell us a bit about Union?
MB: Union is a major German open-ended fund provider with €32 billion assets under management in 22 countries worldwide. We currently invest across Europe as well as the US, Mexico, Japan, Australia and Singapore. Our investment portfolio is well diversified and covers office, retail, hotels, logistics and residential. The majority of our investors are individual retail investors in Germany and we take our fiduciary responsibilities very seriously to ensure our investment strategy is informed and managed through best practice and professional standards.
Qu: How does Union use valuations?
MB: We use valuations for performance measurement of our funds. Unlike equities you don’t get pricing on the screen minute by minute, it’s something that you have to derive from a theoretical transaction, simulated by a valuation.
It’s something we need to do in order to understand the value of the assets. We do this on one hand for regulatory reasons – law requires us to produce quarterly valuations which we then need to transform into unit pricing, because we value the units of our open-ended funds on a daily basis, using quarterly valuations.
We also use it to underpin our investment decisions, on acquisitions for example, and we use the last valuation in the book for disposals because the law doesn’t allow us to acquire above a valuation, nor sell below 3% of an existing and up to date valuation.
The industry is very regulated and we need valuations to conduct our business effectively every day, it’s a prerequisite.
Qu: So are you referring to financial reporting when you say regulatory requirements?
MB: It’s not so much about financial reporting, although we do have the accounts to produce so valuations are certainly important in that regard. The regulation is specifically around investment practices, to be able to show our investors - who are primarily retail investors - what we have used their money for.
We’re in the business of investing other peoples’ money and valuation is the gatekeeper of proofing that we are doing it right.
Qu: How important is valuation accuracy and professionalism?
MB: Valuation is not simply a real pricing like you get when you are trading equities, it’s not a price point which comes from an offer and the acceptance of that offer it’s something that simulates a transaction. In that sense it’s actually more of a philosophical approach to determine what would have been the price in the open market, a hypothetical transaction.
For a valuation to be performed in a manner which is as close to the potential real transaction as possible you’ve got to be professional and you’ve got to have robust data. Valuation is both an art, which requires judgement, and a science, which requires data. Above all, valuation absolutely requires accuracy and professionalism.
Qu: What are the challenges that investors face relating to valuation?
MB: It’s often the lack of accuracy and consistency that you can encounter in different markets.
It can be difficult to arrive at a valuation in an environment where there are few comparable transactions to point to. It’s easy when you are in your comfort zone as a valuer when you have a cloud of real transactions as comparable pricing points, then you comfortably place your subject asset somewhere in the middle and you have some evidence for your decision. If you are in a market which is rising or falling, without the comfortable backing of comparable data you have to come up with a valuation opinion, and that is a real challenge.
Consistency in the quality and reliability of valuations throughout the world is another area where investors can often face challenges, it can lead to added risk.
Qu: We’re seeing investors increasingly move into alternative assets, away from core markets. How does this affect valuations?
MB: It compounds the challenge of accuracy. There are even more imponderables you have to manage, things like vacancies, short and complex leases, the sheer volume of additional assumptions gives rise to the possibility of different opinions and therefore deviation between a valuation and an actual price. The more risky an asset gets the more assumption in an environment of uncertainty the valuer has to make.
Qu: How would you like to see the valuation profession evolve over the next few years?
MB: I would like to see a continued focus on the human element of valuations. While technology and access to new data is certainly helping to enhance valuations, I am concerned about too much automation, report-writing generated through algorithms without necessarily reflecting the complexity and uniqueness of real property assets.
Valuations should still be based on the skill and judgement of a professional valuer, aided but not replaced by tools and technology such as artificial intelligence and algorithms. After all, valuations are hypothetical prices being paid in a transaction between two entities, two human beings, and to anticipate what the price would have been if that transaction had occurred on the valuation date is something which I don’t see machines doing. I want to see professionally qualified human beings with the skillset one requires, aided by the 21st century technological environment.