Posted: 2022 | Pages: 138 | Format: MS Word | Chapters: 1-5 | Others: Questionnaires & References

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ABSTRACT

The outcome of valuation is only certain if we can accurately predict the future. Given that it is not possible, there will always be an element of risk and uncertainty in real estate valuation. This research examines the risk and uncertainty in real estate valuation and investment appraisal. Data collection for the study was through structured questionnaires administered to 273 respondents drawn through Taro Yamani model. Data recovered from 252 completed questionnaires was subsequently presented using frequencies and percentages. The result of the statistical analysis which shows that 5.14 (F-statistics) is greater than 0.1 (level of confidence) confirmed that Risk and uncertainty have significant impact on real estate valuation and investment appraisal.  Findings revealed that imperfect knowledge of the market, lack of databank for storing data of real estate transaction, inadequate comparables and change in rate of return has been the major cause of risk and uncertainty which has led to large margin of errors in valuations. Recommendations include; a need for collaboration with other professionals to create an application that would aid in data collation, making policies that would end the era of data hoarding between colleagues in the built industry and adopting a universal model that would reduce the incident of risk and uncertainty, it concludes that risk and uncertainty be included as assumption in valuation reports.

CHAPTER ONE

1.0 INTRODUCTION                       

1.1       BACKGROUND OF THE STUDY

 Valuation which is the process of estimating the worth of an asset has always been affected by uncertainties; uncertainty in the comparable information available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the valuation (French, 2007).

 It is generally agreed that uncertainty is due to the lack of knowledge and poor or imperfect information about all the inputs that can be used in the valuation analysis (Byrne, 2000). The terms risk and uncertainty are often used interchangeably since risk is seen as a euphemism for uncertainty, however, this colloquial use of the words is unhelpful in identifying the principal issues involved. It is important to define these words more precisely, as several definitions and discussion about risk and uncertainty have been the cornerstone of a number of papers and books (Bryne, 2000; Hargitay and Yu, 1993; Pellat, 1972; Pyhrr, 1973; Robinson, 1987; Sykes, 1983; Whipple, 1988; Wooford, 1978).

Baum and Crosby (2000) opined that risk/return is a fundamental focus in modern investment analysis. Sophisticated investors, especially in more advanced property markets like those in the US and UK, are increasingly requiring downside risk analysis and adjustment from Valuers/appraisers in valuation and investment analysis (Ogunba and Ajayi, 2007; Ogunba, 2008).Risk and uncertainty are inherent parts of the valuation process because the valuer is unable to specify and price accurately all current and future influences on the value of the asset (Adair and Hutchison, 2005). Valuation estimate has therefore been described as a “snapshot” in time that is meant to provide market price at a single point in time. It is an estimate and any estimate is uncertain (Joslin, 2005). Uncertainty comes up in property valuation due to imperfect information or lack of knowledge of all the inputs that will be required in the derivation of the estimate of value. Similarly, eliminating uncertainty from property valuation will therefore not be possible as no valuer has perfect information about all the circumstances that can impact on the outcome of the exercise at his disposal. Unless a property is actually sold to determine market price, any estimate is uncertain (Lorenz, Truck and Lutzkendorf, 2006). The role of the valuer is therefore to assess current market conditions from a “sea of uncertainty” to produce a single judgment (Joslin, 2005; Lorenz, Truck and Lutzkendorf, 2006).

Several years ago, Ratcliff (2000) remarked on the need to analyze risk in investment analysis; “we must recognize that the value of a property cannot be expressed in a single unchallengeable figure’’ the appraiser must frankly admit that his predictions are fraught with various degree of dependability. Thus, he is responsible for giving his client (the investor) the benefit of his opinion of the degree of certainty of his findings, expressed as a probability qualification to the value figure in his report”. The argument raised by (Ratcliff, 2000) has been gaining support from UK authors such as Baum et al (2000); Mallinson and French (2000); Dubben and Sayce (2001) and Evener (2001). There has been similar campaign for this in Nigeria too of late Ajayi (1994), Aluko (2000), Bello(2007), Babajide (2005), Otegulu, Mohammed and Babawale (2011), Ajayi  (2014).

 However, the extents to which uncertainties have been expressed by Nigerian valuers have been largely uninvestigated. While Oluwunmi et al. (2011), Aluko (2007), Ayedun et al. (2011) and Adetokunboh et al. (2012) all focused on the assessment of the satisfaction of lender clients with the quality of mortgage valuation reports in the country, Babawale (2011) had in the process of assessing the current standard of real estate valuation practice in the country examined the compliance of valuation reports with International Valuation Standards.

Despite the several effort put in by different scholars in establishing a more acceptable and less criticized valuation report, clients and respective individuals and parties at the receiving end are still of the opinion that values and figures realized by valuers does not fully represent the market opinion, buttressing the unreliability of such figures. Hence the need for a more ardent and consistent look into data used before and after analysis and collating/reporting of final judgement of values arrived at.