Variance in commercial property valuations for lending purposes: an empirical study
| Date | 01 June 2001 |
| DOI | https://doi.org/10.1108/14635780110387619 |
| Published date | 01 June 2001 |
| Pages | 267-282 |
| Author | James Bretten,Peter Wyatt |
| Subject Matter | Property management & built environment |
Academic papers:
Property
valuations
267
Journal of Property Investment &
Finance, Vol. 19 No. 3, 2001,
pp. 267-282. #MCB University
Press, 1463-578X
Received June 2000
ACADEMIC PAPERS
Variance in commercial
property valuations for lending
purposes: an empirical study
James Bretten
GVA Grimley, Bristol, UK, and
Peter Wyatt
Faculty of the Built Environment, University of the West of England,
Bristol, UK
Keywords United Kingdom, Commercial property, Individual behaviour
Abstract Investigates the extent and possible causes of variance in property investment
valuations for commercial lending purposes within the UK. A literature review was undertaken
and a questionnaire survey was circulated to individuals involved in the commercial property
valuation process in order to gauge professional opinion. The survey revealed that the main cause
of variance was found to be a result of the individual valuer's ``behavioural influences''. The
survey also found that parties to a valuation instruction widely accept the margin of error
principle, the legal manifestation of valuation variance, as a test of negligence.
1. Introduction
Valuers do not operate with perfect market knowledge, they must follow client
instructions, make judgements, analyse information and respond to different
pressures when preparing a valuation and all these factors influence the final
valuation figure. Values can be difficult to assess due to the heterogeneity of
property and the number of transactions that occur at prices that do not
represent market values. The ability of valuers to make effective estimations of
value has been subjected to intense scrutiny by academia, the media and the
courts and the apparent lack of a coherent and consistent result from the
valuation process has damaged the reputation of the valuation profession.
Although the profession has sought to enforce more rigorous mandatory
standards, backed by detailed guidance notes, there remain instances where
valuers have fallen below the required standard. An area of particular
vulnerability is the different opinions of value that two or more valuers may
assign to the same property over the short term. This is known as valuation
variance and its implications are far reaching. In particular, the courts have
adopted the margin of error concept (the legal manifestation of valuation
variance) as a means of establishing whether a valuer has been negligent.
The aim of this paper is to identify the extent and possible causes of
valuation variance in property valuations for commercial lending purposes in
the UK and to determine whether a valuation bracket is accepted as a test of
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negligence by valuers and their clients as a means of placing limits on the
amount of variance deemed acceptable.
The paper is structured as follows. Section two briefly reviews UK literature
on valuation variance and summarises the development of the margin-of-error
concept in the courts, which has evolved from cases of valuation negligence
where variance has been an issue. Section three describes the methodology and
reports the findings of a survey of parties to the valuation instruction for
lending purposes. Section four discusses the implications of the survey results
in the light of the literature review findings and conclusions are drawn.
2. Variance in property valuation
Hager and Lord (1985) were among the first to report valuation variance in
their investigation of the property investment market and property valuations.
Since that time there have been several studies of the extent and possible
causes of valuation variance. These are considered below.
2.1 The existence and extent of valuation variance
Brown (1985) compared one company's valuations against those of another and
found that there was no tendency to either over or under value between one
firm and another. In essence, one company's valuations were a good proxy for
another, suggesting an absence of bias but not eliminating the likelihood of
variance.
Hutchison et al. (1996) undertook research into variance in property
valuation, involving a survey of major national and local firms. The average
overall variation was found to be 9.53 per cent from the mean valuation of each
property. They also found evidence to suggest that valuation variation may be
a function of the type of company that employs the valuer; whether it is a
national or local firm. The study revealed that national practices produced a
lower level of variation (8.63 per cent) compared with local firms (11.86 per
cent) perhaps due to the level of organisational support, especially in terms of
availability of transactional information. Levy and Schuck (1998) also found
that access to information in different companies may affect a valuer's
perception of the market. For example, valuers who work within a multi-
disciplinary environment have access to current market information including
specific details of individual transactions.
In a survey of valuers, Harvard (1999) found that 58 per cent of respondents
thought that +/-5-10 per cent was an appropriate range for a typical, relatively
simple standing investment property in which a valuation could be expected to
fall.
With regard to commercial property valuations for lending purposes, Lavers
et al. (1996) found that the majority of lenders wanted the valuation expressed
as a single figure. However, Lizieri and Venmore-Rowland (1991) believe that a
valuation should not be regarded as a single value but rather as a point
estimate within a range of values.
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