Effects of valuation variance and inaccuracy on Nigerian commercial property market. An empirical study
| Date | 04 April 2016 |
| Published date | 04 April 2016 |
| Pages | 276-292 |
| DOI | https://doi.org/10.1108/JPIF-08-2014-0056 |
| Author | Oluseyi Joshua Adegoke |
| Subject Matter | Property management & built environment |
Effects of valuation variance and
inaccuracy on Nigerian
commercial property market
An empirical study
Oluseyi Joshua Adegoke
Department of Estate Management, Obafemi Awolowo University,
Ile-Ife, Nigeria
Abstract
Purpose –In the absence of continuously traded, deep and securitised markets, commercial property
valuations perform a vital function in the property market by acting as a surrogate for transaction
prices. The ability of valuers to make effective estimation of value is therefore a vital issue in
commercial property market. The purpose of this paper is to examine the effects of valuation variance
and inaccuracy on Nigerian commercial property market.
Design/methodology/approach –Questionnaires were used in collecting data from 163 randomly
selected estate surveying and valuation firms in Lagos Metropolis with a record of over 60 per cent of
the total population of estate surveying and valuation firms in Nigeria. Both descriptive and inferential
statistics were used to analyse the data collected.
Findings –The results revealed that valuation variance and inaccuracy causes fluctuation in the price
of property, sending wrong signal to the market participants and jeopardising the future of commercial
property market. It also, exposed valuers to negligence liability, loss of valuers’credibility and
reduction of valuers’integrity.
Practical implications –The paper concluded that quality data bank system is needed to obtain
accurate comparables which are the cornerstone of market valuation. Also, surveyors in the academia
should revisit the techniques they have developed with a view to replacing or modifying them into a
format that are easy to use by practitioners. The findings of the study will be of importance to estate
surveyors and valuers, estate surveying and valuation firms, government agencies in charge of
property taxes as well as investors in commercial properties.
Originality/value –The paper is one of the few attempts at examining valuation variance and
accuracy in Nigeria. This paper examined the effect of valuation variance and accuracy on Nigerian
commercial property market.
Keywords Nigeria, Commercial property, Property valuation, Inaccuracy, Property market,
Valuation variance
Paper type Research paper
1. Background to the study
Property valuation is generally defined as the art or science of estimating the value of a
property for a specific purpose or interest at a particular point in time, taking into
account all the features of the property and all the underlying economic factors of the
market, including the range of alternative investments (Baum, 1984; Millington, 1994;
Ajayi, 1998; Aluko, 2000; Olusegun, 2000). It is an economic concept, a process of
estimating the likely market price of a property if it is offered for sale (Isaac and Steley,
2000). Valuation is actually a problem-solving imperative as it is demanded for various
purposes such as mortgage, sale, purchase, compensation, insurance, merger and
acquisition. Baum and Macgregor (1992) note that the client’s demand centres on
objective advice which places property valuation in the context of a wider economy
Journal of Property Investment &
Finance
Vol. 34 No. 3, 2016
pp. 276-292
©Emerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-08-2014-0056
Received 28 August 2014
Revised 27 February 2015
2July2015
23 July 2015
3 August 2015
Accepted 4 August 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
276
JPIF
34,3
using the vocabulary and analytical techniques of other markets. In the absence of
continuously traded, deep and securitised markets, commercial property valuations
perform a vital function in the property market by acting as a surrogate for transaction
prices (Adegoke, 2008). As with asset prices in the equity and bond markets, property
asset valuations are central to the interrelated processes of performance measurement,
acquisition and disposal decisions (Adegoke, 2006).
Hordijk et al. (2011) compare standards across the countries, indicating that
valuation standards as usually applied are country specific. Another study on
valuation practices has to do with the issue of legal framework. The study which was
conducted by Yiu et al. (2006) and Adegoke (2006) show that valuations often do not
reflect actual market values because of the valuer’s actions rather than legal
requirements. However, property investors are increasingly becoming international in
outlook and are increasingly demanding the same standards or quality services
rendered by professional agents in other better economies of the world. In view of the
effects of globalisation, Ajayi (2010) affirms that regional valuation standards are
giving way to international standards. The International Valuation Standards Council
(IVSC) promotes the development of the valuation profession around the world and
cooperates with other organisations concerned with standardisation and regulation in
the financial market; the latest revised version was issued in 2014. One of the objectives
of IVSC is to build confidence and public trust in valuation by creating a framework for
the delivery of credible valuation reports by suitably trained valuation professionals
acting in an ethical manner (IVSC, 2014). The overriding objective of the IVSC is to
increase the confidence of beneficiaries of valuation services. All these attest to the fact
that standardisation of property valuation is fast becoming a global issu e.
In recent past, the discipline of property valuation attracted a lot of attention
especially in the areas of variance and accuracy, valuation standards and the
development of new techniques of valuation (Bello and Bello, 2007). This was because
of the financial crises that were traced to property-related transactions then (Gilbertson
and Preston, 2005). The financial crises began in the UK in the early 1970s and resulted
in the collapse of property market in the 1990s. The USA’s savings and loan crisis was
also witnessed in the 1980s. Meanwhile, parts of the property and financial crises were
attributed to poor quality valuation standards used to secure bank loans (Gilbertson
and Preston, 2005; Dugeri et al., 2012). Fernandez (2010) notes that if “system”was a
major contributory factor in the US financial crisis, upon re-examination, the various
components of the global financial system need scrutinising, and one of the
components of the system is “the need for proper valuations”of not only real estate
interest but those of business and finance. He further stresses that the valuations for
the mortgage-backed securities, the collateralised debt obligations and the synthetic
collateralised debt obligations were far too complex for the public to understand, or
that they were not properly done. As a result, much attention has been given to the
assessment of valuation profession in the USA in the post 2007/2008 global financial
meltdown. The foregoing compelled the Royal Institute of Chartered Surveyors in the
UK to develop and raise the standards to ensure that valuation reports produced by
members are of high standards in terms of integrity, clarity and compliance to
requirements appropriate for each purpose. Similar reason led to the formation of The
Appraisal Foundation by major US and Canadian Appraisal Organisations to produce
Uniform Standards of Professional Appraisal Practice (Ajayi, 2009).
Incidentally, the Nigerian valuation theory and practice are UK inherited. The
Nigerian Institution of Estate Surveyors and Valuers (NIESV) followed the trend of
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Nigerian
commercial
property market
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