Unsmoothing British valuation‐based returns without assuming an efficient market

Abstract

The United Kingdom is well endowed with property indices, most of which are valuation based. Because valuers have incomplete information they tend to be influenced by past valuations of the subject property or past transaction prices of comparable properties. One result of this is that contemporaneous valuations may contain components of past market values, which induces a lagging and smoothing within an aggregate index. This paper demonstrates how the underlying market values may be recovered from a smoothed index, without assuming that the underlying property market is informationally efficient. The methodology is applied to the Jones Lang Wootton Index of capital values. The characteristics of the smoothed and unsmoothed indices are compared and some resulting implications about the optimal weighting of property in a multi‐asset portfolio are discussed. Our results support the hypothesis that British commercial property markets are ‘weak‐form’ efficient. Implications for optimal valuation procedures for valuing properties within an index are also discussed.