An investigation into the expression of uncertainty in property valuations
| Pages | 269-285 |
| DOI | https://doi.org/10.1108/14635780510599476 |
| Published date | 01 June 2005 |
| Date | 01 June 2005 |
| Author | Alexander Joslin |
| Subject Matter | Property management & built environment |
PRACTICE BRIEFING
An investigation into the
expression of uncertainty in
property valuations
Alexander Joslin
Savills Commercial Ltd, London, UK
Abstract
Purpose – Valuation is a “snapshot” in time. It is an assessment of the market price at a single point
in time. It is an estimate and any estimate is uncertain. This paper aims to investigate how the
property profession conveys this uncertainty to their clients. Uncertainty must be dealt with in a
professional manner in order to offer a reputable service to the general public. It is argued that
uncertainty must be expressed within the valuation to offer each party a thorough understanding of
the circumstances that surround that particular valuation. It is suggested that the Royal Institution of
Chartered Surveyors (RICS) should develop a standard approach to uncertainty expression, not only
for the valuer’s peace of mind, but in order to offer the best possible service to the general public.
Design/methodology/approach – The paper reports the findings of a survey of valuers from
leading practices throughout the UK. Examples of uncertainty are included in order to highlight the
key issues within the discussion.
Findings – The concept of uncertainty within a valuation is poorly understood and is rarely
conveyed to the client in any coherent form.
Originality/value – “What additional information does one need a valuer to provide, apart from the
figure of his valuation?” In the majority of cases, the valuer’s expression of uncertainty is integral,
whereby one must express the amount of uncertainty present when undertaking a valuation. In order
to offer a client an accurate valuation, the valuer should make clear the background to the value
presented and offer evidence about which factors may affect the figure, with regard to variation.
Keywords Uncertainty management, Assets valuation, Market value
Paper type General review
Introduction
In 1994, the Royal Institution of Chartered Surveyors (RICS) published the Mallinson
Report (RICS, 1994). The main content of the report was to assess the, then, current
valuation practices and to recommend a number of changes that would allow the
valuer to offer an enhanced service to the client.
The Mallinson Report was a response to the general criticism, post the property crash
of the late 1980s, that valuations in many cases have been unsupported and insubstantial.
A valuation is a “snapshot” in time and is an estimate of market price. As such, it is
uncertain. Unless a property is actually sold to determine market price, any estimate is
uncertain. The role of the valuer is to assess current market conditions and from a “sea
of uncertainty” produce a single judgement (RICS, 1994, p. 14). Depending on both the
property and the market, valuers will be more or less certain about the valuation. A
valuation is based on probability of outcome and the corollary of this is uncertainty of
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Practice
briefing
269
Journal of Property Investment &
Finance
Vol. 23 No. 3, 2005
pp. 269-285
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780510599476
output, the valuation figure. Recommendation 34 of the Mallinson report specifically
addressed this issue by stating:
Common professional standards and methods should be developed for measuring and
expressing price trends and expressing uncertainty.
How should probability or uncertainty be expressed? The Mallinson Report concluded
that in most cases an indication of valuation variability is favoured within the context
of a single figure of valuation.
One of the principal criticisms that was addressed by the Mallinson Report was that
valuers generally failed to provide credible explanations of the valuation figure. They
were reluctant to give crucial background information such as market assumption s or
the dynamics of the market at the time of the valuation. A response to this failing
would be to introduce a set standard for the expression of uncertainty. French and
Mallinson (2000), argued that these failings would be overcome if valuers had a
common technique for reporting uncertainty:
The solution must lie in the creation of some format description, accepted as a norm, which
conveys the essence with simplicity, but is capable of expansion and interpretation. This
would need to be presented in a prescribed professional standard, and would always be
appended to the valuation figure.
It would appear obvious that the industry needs to strive to make the expression of
uncertainty part of the valuation process, not something that is merely mentioned at
the end of a conversation of dropped subtly into a meeting summary. If action is to be
taken, the subject area must be thoroughly investigated and a plan of action devised.
The most recent study relating to property valuation was the RICS Carsberg Report
(RICS, 2002a). Like the Mallinson Report, the Carsberg Report raises issues and
concerns about the industry and finally makes a number of recommendations.
Recommendation 15, refers to uncertainty and reads:
RICS should commission work to establish an acceptable method by which uncertainty could
be expressed in a manner which will be helpful and will not confuse users of the valuation.
RICS should also seek to agree with appropriate representative bodies of those
commissioning and using third party valuations the circumstances and format in which
the valuer would convey uncertainty.
In the formal response to the Carsberg Report (RICS, 2002b), it was stated:
At present, the valuer can readily express this [uncertainty] to a single client, but there is no
robust and understood mechanism for him to do so...therein lies the scope for misunderstanding .
The RICS feels unable to recommend a particular method for reporting uncertainty around the
single valuation estimate, but it considers that clients deserve more information than they
normally receive at present.
This response would suggest that individual valuers must take the issue into their own
hands and offer the client what they feel is their best price estimate.
The subject of expressing uncertainty is a complex topic and there are many
arguments for and against it, however it is now well established that it plays an
important role in valuation. One must consider the client’s needs and the importance of
being told not only the valuation, but also the factors that impact on the valuation.
JPIF
23,3
270
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