Real Estate Valuations in the Urban Renewal Era
24 September, 2019
Maurizio Negri MRICS – Director of PRAXI Valuations – Global Independent Advisers for the September issue of Il Quotidiano Immobiliare magazine.
It’s evident to everyone in the real estate business that urban renewal is crucial for the future of our sector. Even non-experts can understand the need to preserve a country’s most precious and limited resource: land.
Formally speaking, we refer to greenfield and brownfield, terms typically reserved for rural and industrial redevelopment projects, while the area requiring our maximum effort and focus is actually urban renewal.
Vacant and underutilized buildings line many cities and towns worldwide and, while they leave a legacy of a more or less distant past, they are nevertheless useless. A smart re-activation and reuse of these properties is necessary in order to convert former barracks, empty factories, abandoned hospitals, as well as working-class neighborhoods that have become ghettos, or worse, “drug dens”.
To be effective and provide real solutions, urban renewal requires a high degree of coordination and involvement that goes beyond the real estate sphere, into social, economic and political aspects, all driven by the desire to transform and renew the built environment.
Looking at our experience here in Milan, one can clearly see how development projects have radically transformed entire areas of the city, previously degraded and neglected. Thanks to the new PGT (Town Planning Regulation) other urban areas (former railway stations, “Piazza d’Armi”, “Porto di Mare”, to name only a few) will go through a similar revitalization.
In the face of this enormous task, as a real estate appraiser, I ask myself: is there a future for property valuations in this era of urban transformation? Will the same criteria and standards, like the IVS and Red Book, continue to provide coherent and useful guidance about the economic value of a property?
It’s time to carefully analyze how relevant valuations “dogmas” really are: concepts such as Highest and Best Use, or Market Value. These valuation theories rely on a continuation of dynamics that no longer exist and fail to account for the nuances that guide urban renewal projects.
Highest and Best Use, for example, assumes that for every property there is an “ideal use” that maximizes its economic value. How can you align such a theory to the dynamism of urban transformations, which are driven by the ever-evolving way we live, work, study, and have fun? How can one establish, a priori, “optimal” usage, excluding any consideration for its true feasibility or actual interest from owners and occupiers?
What about the concept of Market Value, which always assumes the existence of a buyer and seller? I’m thinking of those who promote the temporary use of abandoned buildings. Here in Italy, we remember the resounding success of the Guido Reni district in Rome : a large former barracks in a semi-central area of the city, which has been revitalized as a venue for business events, runway shows, private parties, film shoots and arts and crafts markets, reaching the stunning record of more than 1 million visitors in a year!
Let’s think to the government’s property agency (Agenzia del Demanio), which has to implement the “creative plans for public real estate disposal” planned by the Italian government, or to entities such as Banca Illimity, who finance investors who (finally) try to execute solid recovery plans for NPL real estate collateral. These and other analogous market players do not care how much, from a theoretical standpoint, the building is worth in case of a perfect (and non-realistic) balance between supply and demand; they would rather have their appraiser help them analyze concrete options and viable alternatives, or weigh real constraints and actual impediments.
Should we appraisers be discouraged by the failings of our traditional approach and quit our jobs? Of course not! Instead, we should challenge ourselves to align our profession with the changing world. And use our skills and experience to fuel transformation processes while promoting the evolution of the guiding rules and principles of real estate appraisals.