Valuing in the downturn: understanding uncertainty

Abstract

PurposeIn the last ten years, there has been much debate about the veracity and certainty of valuations. However, this academic analysis was not mirrored in the profession as the buoyancy of the property market meant that rising prices hid any worry about the certainty of the valuation. But since 2007, the downturn has lead to a paucity of transactions and an accentuated degree of uncertainty. Valuers worldwide have been asking how to account for this uncertainty in their valuations. This paper aims to address this issue.Design/methodology/approachThis paper looks at the way in which uncertainty can be reported to the user of the valuation both in a form of words in accordance with the RICS's Valuation Standards as well as the suggested use of a probability‐based valuation model (using Crystal Ball) that provides a graphical representation of the expected state of the market at the time of the valuation.FindingsThe RICS Standards require the valuer to report uncertainty in valuations but they do not offer any advice on the form that such advice should take and, thus, there is no consistent approach. This paper suggests a matrix of outputs to allow users to identify quickly the uncertainty in the market at the date of the valuation.Originality/valueThis study contributes significantly to the practical application of probability‐based models to valuation. In particular, the findings from the study will be useful for clients to understand better the context in which a valuation figure is provided to them.