Uncertainty in property valuation – The nature and relevance of uncertainty and how it might be measured and reported
| Pages | 13-32 |
| Published date | 01 February 2000 |
| Date | 01 February 2000 |
| DOI | https://doi.org/10.1108/14635780010316636 |
| Author | Michael Mallinson,Nick French |
| Subject Matter | Property management & built environment |
Academic papers:
Uncertainty in
property
valuation
13
Journal of Property Investment &
Finance, Vol. 18 No. 1, 2000,
pp. 13-32. MCB University Press,
1463-578X
Received October 1998
Revised December 1999
ACADEMIC PAPERS
Uncertainty in property
valuation
The nature and relevance of uncertainty
and how it might be measured and
reported
Michael Mallinson and Nick French
Department of Land Management and Development, The University of
Reading, Reading, Berkshire, UK
Keywords Uncertainty, Market value, Valuation
Abstract There will always be a degree of uncertainty in any valuation, but it should be
incumbent upon the valuer to report ``abnormal uncertainty''. This arises when some particular
condition of the market or the property leads to the valuer being unable to value with the
confidence of accuracy which might normally be expected. Abnormal uncertainty now features in
the RICS Appraisal and Valuation Manual and later in this paper we consider how the valuer
might identify and measure the degree of abnormal uncertainty. But this paper is predominantly
concerned with ``normal uncertainty'', which hereafter we will term only as ``uncertainty''. The
thesis of this paper is that uncertainty is a real and universal phenomenon in valuation. The
sources of uncertainty are rational and can be identified. They can be described in a practical
manner, and, above all, the process of identification and description will greatly assist many
clients, and will improve the content and the credibility of the valuer's work. Common professional
standards and methods should be developed for measuring and expressing valuation uncertainty
(Recommendation 34, Mallinson Report, RICS, 1994).
Introduction
In March 1994 the Mallinson Working Party on commercial property
valuations produced its report outlining a number of initiatives which the RICS
should undertake to help improve the standing of the valuation surveyor
within the business world.
A number of these recommendations concerned improving the
communication process between the client and the valuer and these
recommendations have formed the foundation of the new provisions contained
within the revised Red Book (RICS Appraisal and Valuation Manual, 1996).
However, the Red Book is principally concerned with the purpose of the
valuation; the basis of the valuation and the form of reporting the valuation to
the client. It does not fully address the question of quantitative method or
indeed the limitations of the valuation figure.
The Mallinson Report argued that all valuations are uncertain. A valuation
figure is an individual valuer's estimate of the exchange price in the
marketplace. They are not a statement of discerned, objective fact, but rather
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deduced assessments that give an expert's opinion. Despite this, clients and
third parties who intend to use a valuation as a basis for action are inclined to
treat it as if it were fact.
One of the principal tenets of The Mallinson Report was that valuers should,
when necessary, expand on not just the details about the property, but also on
the valuation itself; its dynamics; its relativities and its uncertainties.
There will always be a degree of uncertainty in any valuation, but it should
be incumbent upon the valuer to report ``abnormal uncertainty''. This arises
when some particular condition of the market or the property leads to the
valuer being unable to value with the confidence of accuracy which might
normally be expected. Abnormal uncertainty now features in the RICS
Appraisal and Valuation Manual and later in this paper we consider how the
valuer might identify and measure the degree of abnormal uncertainty. But this
paper is predominantly concerned with ``normal uncertainty'', which hereafter
we will term only as ``uncertainty''.
The thesis of this paper is that uncertainty is a real and universal
phenomenon in valuation. The sources of uncertainty are rational and can be
identified. They can be described in a practical manner, and, above all, the
process of identification and description will greatly assist many clients, and
will improve the content and the credibility of the valuer's work.
What is ``uncertainty''?
When preparing a valuation, the valuer is seeking to estimate market price; the
price (in either capital or rental terms) at which the property might be expected
to transact on the basis of the given assumptions. In reaching his/her
judgement, uncertainty will arise in the valuer's mind, owing to the difficulty
either of assessing the market itself or of assessing how the market would price
the particularities of the subject property.
Under the bases of valuation set out in the RICS Appraisal and Valuation
Manual (e.g. market value (MV) or open market value (OMV)), the valuer is
instructed to view the transaction through the eyes of a hypothetical buyer.
The valuer must consider all possible buyers in the market in order to identify
the ``best'' price likely to be forthcoming. In performing this task the valuer will
be uncertain about the current availability of buyers, their current attitude to
price, and what they would make of the particular property.
Against this background, in even the simplest of valuations there are likely
to be a number of variables that the valuer must assess. For example, in a
vacant possession house valuation, even if the house is similar to others which
have been sold recently, the valuer must assess, through the eyes of the
hypothetical purchaser, slight differences in location, the time since the last
transaction, differences in standards of fitting, etc. For more complex
properties the number of variables will multiply. In order to produce the
valuation, the valuer must weigh all the variables, using his/her skill and
experience, and decide on the most probable conclusion.
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