Surveyors uneasy in the spotlight: Tom Stevenson considers the plight of property valuers deeply embarrassed by the Queens Moat Houses debacle

Abeleaguered surveying profession will watch this week's meetings of share and bondholders in Queens Moat Houses with more interest than usual. It knows that its reputation for accuracy and objectivity is in increasing doubt.

Already dealt a serious blow by the way in which two leading firms produced two wildly differing valuations of the debt-laden company's chain of hotels, chartered surveyors will be desperate to avoid a damaging rejection of the company's accounts.

That is one possible outcome of today's annual meeting, with shareholders, including Scottish Amicable, indicating doubts about the validity of the company's annual report for 1992.

They claim that a huge discrepancy between the values suggested by Weatherall, Green & Smith and Jones Lang Wootton leaves them unable to judge the real state of Queens Moat's financial health.

Earlier this year, Weatherall put a price tag of pounds 1.8bn on the hotels, reduced its estimate to pounds 1.35bn and then found itself trumped by a Jones Lang valuation of just pounds 861m.

With the company struggling to put together a refinancing package in the wake of one of the UK's biggest ever corporate losses, fixing a realistic figure is crucial.

Shareholders, who stand to lose much of the value of their equity, and mortgage debenture holders, who are uncertain whether the covenants of their debt have been breached, have both been left bemused by the uncertainty.

Clive Lewis, president of the Royal Institution of Chartered Surveyors, said: 'I've never known a gap as big as this in a valuation. Every layman will wonder how the hell that can happen with two reputable firms involved.'

His incomprehension was shared by the accountancy profession, the value of whose audits often depends on the usefulness of the numbers they receive from their surveying colleagues.

One accountant said: 'We were conned by the chartered surveyors in the late 1980s into thinking that they had an objective methodology. This highlights the incredible subjectivity in the valuation of any asset when there is an illiquid market.'

Richard Baldwin, head of valuation at Weatherall, Green & Smith, agrees that arriving at a value for a property is more difficult in a thin trading market, but disputes the fact that the profession's work is necessarily subjective.

Mr Baldwin points out that most of the measures a surveyor uses are simply reflections of actual transactions relating to comparable properties: 'We don't make values, merely interpret markets.' He admits, though, that some properties are easier to value than others.

Hardest of all to value accurately, according to Mr Baldwin, is development land, which, because it is relatively inexpensive in terms of the total value of a completed scheme, can be extremely volatile.

For example, a site for a building costing pounds 80m to build and expected to be worth pounds 100m, might be worth pounds 20m. However, if the expected value were to rise by 10 per cent to pounds 110m, unchanged building costs would push the land value up to pounds 30m, a 50 per cent increase.

At the other end of the scale, a fully let office building with a blue-chip tenant on a long lease is relatively easy to value.

That is because, looked at through the simplistic eyes of an investor, the value of a central London office building reflects nothing more complex than the rent it attracts and the yield at which the market is prepared to capitalise that income flow.

Even in a property downturn, surveyors are likely to be able to point to recent transactions involving similar buildings and so come up with a realistic value.

In practice, of course, matters are a great deal more complicated than that. Subtle differences in location, quality of building and services offered will alter the rent the property can achieve.

The yield, too, will reflect the quality of the tenant, how long their lease has to run, the interest rates available from other securities and the likely rise (or fall) in future rents.

Measuring these factors requires judgement and can never be wholly objective but, according to the profession, the process is a great deal less capricious than outsiders believe and a lot less open to abuse than it used to be.

After what Mr Baldwin admits was little more than a free for all in the early 1970s, the RICS introduced a series of guidance papers, collectively known as the 'red book', to try and eliminate the worst abuses.

Larger than Chairman Mao's, the red book is waved with no less fervour by a defensive profession determined to persuade the outside world that it has improved its standards. In 1990 the recommendations were made mandatory.

Valuing hotels, and other trading properties such as petrol stations and bingo halls, however, is arguably still open to too much interpretation. In terms of complexity the exercise falls somewhere between the empty plot of land and the shiny office in a prime location.

Because the value of a trading building such as a hotel is inextricably tied up with the business it houses, valuers find themselves required to make judgements about issues they cannot be expected to understand fully.

Again, the surveyor has guidelines and yardsticks, such as value per room and occupancy rates, with which to value the hotel. But hotels differ more than office blocks, undermining the usefulness of generalisations.

Ultimately the value of a hotel is a reflection of its profitability, about which surveyors have little knowledge. This makes surveyors dependent to a high degree on what a company's management tells them about prospects. That, in turn, makes them vulnerable to the vested interests of their client.

Plainly, a hotelier who plans to borrow more money from his banker will like to see a high valuation to increase the potential collateral for the loan and will be tempted to talk up potential profits. A new manager, keen to maximise future growth in assets, will happily settle for a low figure.

Firms of the size of Weatherall Green and Jones Lang are unlikely to be driven by the fear of losing a single client because their valuation does not accord with management's wishes. But it would be naive to think that for smaller businesses it was not a consideration.

In an active market another issue likely to lead to divergent valuations is timing. Its importance in judging the validity of valuations was demonstrated recently by the rejection by shareholders of a proposed rescue by Postel, the pension fund, of Greycoat, a highly-indebted property developer.

Shareholders felt that the valuation being used by Postel as the basis for its approach had been overtaken by the subsequent recovery in the UK property market. The Postel plan was voted down.

So how much variation can reasonably be expected between two separate valuations, made at the same time and using the same open market assumptions?

According to Mr Baldwin, a rule of thumb in the industry is that plus or minus 10 per cent is reasonable. In negligence cases the courts are thought to regard plus or minus 15 per cent as acceptable.

The two valuations of Queens Moat's portfolio are 22 per cent either side of the average. With the property market stirring again after a four year hibernation, the valuation question is unlikely to go away whatever the outcome of the Queens Moat meetings.

(Photograph omitted)