Valuation uncertainty – when and why this is important
| DOI | https://doi.org/10.1108/JPIF-07-2020-0077 |
| Published date | 28 September 2020 |
| Date | 28 September 2020 |
| Pages | 500-508 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Chris Thorne |
Education Briefing
Valuation uncertainty –when and
why this is important
Chris Thorne
Valuology, Bristol, UK
Abstract
Purpose –The recent coronavirus pandemic created uncertainty across most markets. This has resulted in
many valuations being reported with caveats warning that they are uncertain. However, many valuers and
their clients remain unclear as to what these warnings are supposed to convey and why they are required by
many valuation standards, including the International Valuation Standards. The purpose of this paper is to
explain how recognition of the need for uncertainty disclosures has developed over the past 25 years and how
such disclosures can enhance overall trust in valuation.
Design/methodology/approach –The author has been involved in the developmentof the guidance issued
by both the International Valuation Standards Council and Royal Institution of Chartered Surveyors, which
included extensive consultation with financial regulators and valuation users alike. He has also examined the
wider economic theories of risk and uncertainty and how these need to be clearly distinguished in valuations.
Findings –This paper identifies the situations under which valuation uncertainty can occur, and steps that a
valuer can follow to determine whether it is sufficiently material to require an appropriate caveat to be issued
alongside the valuation. It also examines the merits of different ways in which material uncertaintycan be disclosed.
Practical implications –The paper should provide valuers with a better understanding of the reason why
uncertainty disclosures are required and the circumstances in which they are required. It also provides
principles to help them formulate disclosures that are appropriate in different circumstances.
Originality/value–This is an abridged version of a Valuers’Briefing “Valuation Uncertainty –Reporting the
unknowable”by the author and published as either an eBook or paperback available from Amazon.
Keywords Uncertainty, Standards, Reporting, Valuation, Illiquidity, Disruption
Paper type General review
The uncertainty conundrum
Valuations are estimates of the price that could be obtained on a given date under a given scenario.
These estimates may be made using algorithms in an automated model, by manual mathematical
calculations, by a person using their knowledge of the subject and its market, or a combination of all
three. Regardless of how they are produced, they share one thing in common. Unless the recipient of
the valuation has confidence that the estimate provided is credible, it will be of little use to them.
How do those providing valuations demonstrate that they are credible to those who will
rely on them? A key aspect of ensuring credibility is providing sufficient transparency to
enable the recipient of any valuation to understand how it has been derived and any
consequential limits on its use. Those who rely on values no longer accept the output of the
proverbial black box without question. The need for the valuation process to be transparent is
now axiomatic across most markets.
Discussion of all the ways in which appropriate transparency can be provided is outside
the scope of this paper. However, feedback from those who rely on valuations, and those who
regulate them, indicates that overall confidence in valuations is increased if those providing
them openly admit that the level of reliability is lower than they would normally expect.
This is not the paradox it may seem. Confidence in any service or product is enhanced if
the supplier is honest about potential problems. If valuers pretend all valuation estimates can
be treated with equal confidence, they are deluding themselves and misleading clients, which
ultimately will undermine credibility of all valuations.
JPIF
39,5
500
This paper forms part of a special section “Education Briefing”.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 9 July 2020
Revised 10 July 2020
Accepted 10 July 2020
Journal of Property Investment &
Finance
Vol. 39 No. 5, 2021
pp. 500-508
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-07-2020-0077
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