Topic: Valuation Accuracy and Variance: Compare and Contrast the availability of Property Market Data in the UK and Nigeria and the Valuation Profession and consider the potential impact this may have on valuation accuracy and variance within each country.
The purpose of this paper is to compare and contrast the availability of property market data in the United Kingdom and Nigeria. This paper also considers the potential impact that valuation accuracy and variance may have on the valuation profession within each country.
The paper begins with definitions and general review of valuation accuracy and variance of property market data and it's availability in the respective countries. The paper also discusses a comparative analysis of valuation accuracy and variance between United Kingdom and Nigeria. The study then assessed the potential impact that valuation accuracy and variance would have on the valuation profession in the U.K and Nigeria.
2 REVIEW OF VALUATION ACCURACY AND VARIANCE
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The task of determining any property value can be very rigorous due to various factors associated with the analysis required to give an accurate value of the property been valued. According to Dunes, et al (2010), there is a lawful and particular process in which valuation can be seen even though it does not make valuation an exact science it is therefore a matter of opinion. Also there could be an element of bias in a valuation process, depending on the nature of property been valued, the reasons for which the valuation is been processed, the methodology, and the market data available, and the way valuers looks at various aspects of a property and then assumptions are formed to determine the value of the property.
The term valuation accuracy is use when measuring the nearness of valuations to actual transaction prices. Variances in Valuation, is about the measurement of discrepancies in the valuations of different valuers who have worked on the same property. It can be said that, variance in valuation establishes the spread of values. Several studies have shown that valuation accuracy has always been consisted with the determination of the difference between previous valuations and subsequent transaction prices of properties Crosby, et al (2003).
Valuation accuracy and variance are regularly seen together but each has its own role in valuation process. According to Wyatt (2007) defines valuation variance has the differences found in the values of a property. He noted that inaccuracy and variance are unavoidable in a valuation process. A new phrase called valuation uncertainty is used in recognition of the difficulties faced when determining the level of uncertainty in valuation. The level of tolerance of uncertainty in the valuation profession has been set out in the Guidance Note 1 of the RICS Valuation Standards - Global and UK. The next section of this paper takes a look at the Factors that influence the Inaccuracy of Valuation in property markets.
2.1 FACTORS THAT INFLUENCE THE INACCURACY OF VALUATION
The process of commercial valuation is very complex and there are various reasons for its inaccuracy or situations that influence its risky nature. Wyatt (2003) stated that valuation process could experience inaccuracy at any time even right from the very beginning. From his observation, we can appreciate how valuers are affected when we examine the factors that contribute to the inaccuracy of the valuation process then variances can be reduced. Following Babawale (2006) the key factors that influence the inaccuracy of valuation are Property types and Property Markets; Availability of Relevant Data; The Assumptions in Valuation; Valuer Behaviour and Biases; Valuation Standard Manual; Methods of Valuation; These are discussed below in turn.
PROPERTY TYPES AND PROPERTY MARKETS
First, due to the complex nature of the object involved in valuation, this can create opportunity for inaccuracy or variance to occur during the process of carrying out valuations. In the case of assets valuation of Oando Nigeria Plc a multinational company or the Power Holding Company Nigeria Plc etc. which has several mixed properties all over the nation, the valuation of these companies properties has more tendencies of valuation inaccuracy or variance than residential buildings owned by individuals. For example there was a report on Oando Nig. Plc. 2006 on Assets Valuation in which two prominent valuers submitted in Lagos that produced a variance of over N1.5 billion arising from the collective effects of slight oversight, error in dimensions, error in findings, differences in valuation process and methodology. Oando Nig. Plc. Assets are scattered over the whole country and comprise of Gas and Service Stations, Oil fields, Warehouse, commercial and residential properties, undeveloped land, tanker farms, tankers for fuel, motor vehicles, ships etc.
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Also, the property market can't be seen as a perfect market. This is because of the heterogeneity nature of properties, sales are not carried out as often as expected, there is no centralised trading place etc. In the real estate market values are very difficult to predict. The failure of valuers to ascertain or give an accurate worth of properties in the real estate market has therefore been called the limitation found in the valuation profession (Millington, 1985). However, due to the nature of property, the structures and its environment, valuers are not expected to predict price either precisely or exactly accurately (Bowles et al, 2000).
AVAILABILITY OF RELEVANT DATA
Valuation analysis is impossible to achieve without the availability of relevant data. In general data availability is critical in assessing value. However, in the real estate market it is often difficult if not impossible to obtain reliable data. This is perhaps due to secrecy in the market and/or the lad of collection of such data. This in fact, is influenced by the stage of the market. For example whereas in the UK where the market is seen as a mature market with significant level of data available, in the case of Nigeria, a developing and/or an emerging market, valuers find it extremely difficult to access information that are reliable. The key reason is perhaps due to the fact that information on property market is not publicly disclosed by individuals or owners of properties in the country (secrecy). The conservative nature of the people in the disclosure of such information has in fact, aggravated the situation. Dillinger (1996) remarked that the property market in developing countries is driven underground by high transaction taxes and levies and by rent controls. Thus, basic information on costs, yields, rate of depreciation etc. required for accurate valuation may be unavailable or the quality of data obtained may not reflect the market.
THE ASSUMPTIONS IN VALUATION
Before a property is valued, the valuer needs to make some assumptions about the property. Based on these assumptions the end product of valuation is likely to differ from one valuer to another. According to Baum and Crosby (1988), it is always the case, that because of underlying assumptions that are used in process of valuation it can never be perfect. In their own words "appraisals can rarely be proved inaccurate for many reasons including the fact that all valuations are hedged by series of assumptions'' Some of the assumptions include special purchasers being excluded from consideration. The assumption that the process is fully exposed to the market is an undefined market. Furthermore, it is also assumed that there is limited or price movement over the period when marketing is contemplated, even though full exposure may require a lengthy market period in an era of changing price. As a result of these assumptions, it is not possible for valuation results to be the same as the free interplay of market forces.
VALUER BEHAVIOUR AND BIASES
Valuers behaviour could potentially affect valuation results. Most valuers are faced with difficult financial situations, this in essences force them to look for quicker ways in which to solve or meet their financial obligations. Wyatt (2003) noted that the main cause of valuation variance could be attributed to the personal character of the valuer and that even in UK the profession body (RICS) has implemented more required standards as contained in the guidance notes, valuers still fail to compile with set regulations. According to Levy and Schuck (1999) they noted that ethical decisions have been seen to basically depend on the individual valuers and to some extent the firm they work with and their level of ethical culture. This unethical behaviour is usually caused by the competition among valuers in the property market. They further observed that although the valuers are saddle with the responsibility of giving an informed opinion of value, but they sometimes act against the ethics of the profession in order to satisfy their clients there by accepting economic motivation to avoid conflict over fees and for a quick repeat business. It could be a deliberate act or done accidental.
VALUATION STANDARD MANUAL
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In order to have a comparable way of valuation across countries it will be sensible to have standard manuals to be used by all parties. According to the International Valuation Standard Committee (IVSC 2001) valuation standards are vital in the merging of the property and capital market mostly in developing economies, due to the hastening pace in the globalization of the investment markets, this further emphasizes the need for universally accepted standards for writing the value of property. The RICS Red Book of the Valuation Standard Manual and the International Valuation Standard Committee contains compulsory guidelines that should be applied by its members. This document is to promote consistent assumption on which valuation is provided and also to enable professional competence in high standard. So in cases where this manual is lacking it impacts on the way valuation is carried out.
METHOD OF VALUATION
Another factor that influences differences in valuation and their accuracy is the method use. If you consider the current situation of inflation and instability of property markets whereby there is rising level of costs, including building costs, it will be inappropriate to use conventional valuation methods in valuation because estimates are not reliable. As noted by Aluko (1998) double digit inflation, escalating building cost, new financing arrangements, makes conventional valuation practices inappropriate and run a high risk of producing wrong results. Although there are more vigorous ways of valuation that are capable of accounting for different markets but valuer on the other hand prefer to use the traditional methods not considering the changes that occurs in ages and purchasing power of the local and national trends and they have becomes even more obsolete, ineffective, and unreliable when considering the various investment vehicles.
3 COMPARATIVE ANALYSIS OF EFFECT OF AVAILABILITY OF MARKET DATA ON VALUATION ACCURACY AND VARIANCE BETWEEN UK AND NIGERIA
The focus of this section is to compare and contrast valuation accuracy and variance between UK and Nigeria based on the key factors previously discussed. As a prelude to the analysis the section starts with an assessment of the differences of skills within each of the chosen study areas and how they impact on valuation profession.
First of all, it is observed that variance in valuation estimates from different valuers is based upon the skills acquired, the knowledge required to carry out the valuation process in order to take a valid decision (Aluko 1988; Baum 1998). While examining valuation variance in Nigeria, Ogunba and Ajayi (1998) it was observed that incorrect use of application method on the part of some valuers is caused by their lack of experience and knowledge. The Nigerian professional body also recognises that insufficient training and deficiency in professionalism in the midst of members are usually the cause of reliability issues (NIESV, 1998). On the other hand in the UK, there are higher education institutions whereby the skills of valuers can be improved. Training facilities are abundant in the UK. There are also professional bodies that devote resources in equipping and training to provide requisite knowledge, contrary to what is been portrayed above as in the case of Nigeria. So the end result is that in the process of gathering data for valuation purposes there will be more accurate data in the context of UK compared to Nigeria.
In terms of professionalism, it could be said that valuation in Nigeria and UK has similar professional bodies in the name of RICS overseeing valuation activities. Valuation is controlled in the UK by the Royal Institution of Chartered Surveyors (RICS), and in Nigeria it's the Nigeria Institution of Estate Surveyors and Valuer (NIESV) respectively. It is necessary to give a short story of the formation of RICS as it was founded in 1868 and was registered by Royal Charter in 1881 (RICS, 2009). This has brought about RICS ensuring professionalism in the practice and been able to monitor the valuation process. Professional integrity is ensured by RICS and above all the financing of the study of valuation accuracy, conducted using IPD data (Wyatt, 2007). Nigeria being a former colony of Britain adopted the professional approach of RICS in many of their valuation practices. However, valuation inaccuracy and variance are inevitable due to other conditions besides professional competency and biases whether in UK or in Nigeria. This was acknowledged by RICS as a challenge. They have therefore realised the essence of this and provided a framework on valuation uncertainty under its Guidance Notes (GN1) as contained in the Red Book (2011). In which case the professional approach does not compromise on the accuracy of the data that is been used to assess valuation. In the case of Nigeria however, some factors tend to affect the usage of appropriate data, such as the influence of client as discussed in a previous section.
4 CONCLUDING REMARKS
This paper has considered the definition of the concepts of valuation and its accuracy. It then discussed the various factors that influence valuation accuracy and variance. It is observed that differences in valuation accuracy and variance are influenced by factors including the methods used, availability of data and human factors and biases. Whiles concepts and theoretical elements have been discussed the paper then looked at the key factors that affect differences in valuation accuracy between Nigeria and UK. The availability of data and how it is collected is perceived as a major difference between the two case study areas and thus in this case the lack of adequate training in the case of Nigeria impact negatively on accuracy compared to the UK. Finally it is observed that the level of professionalism between the two case study areas, although governed by similar professional bodies, there are certain weaknesses in the case of Nigeria where much of client influence is seen as impacting so much on valuation accuracy and variance compared to UK. By and large, valuation in both cases has typical procedures but there are largely common attributes between the cases under review.