English
中文Introduction
Property valuations have long been considered as a reliable basis for most business decisions. This is expected since property and equipment comprise a major portion of the business assets and considered as the source of the company’s financial strength. Although it suffers from the disadvantage of a commodity that could not be conveniently traded because of its sheer size, business property has been the subject of various deals involving millions of dollars/pounds. Developments and innovations have made possible the consummation of transactions involving various property and equipment.
Property valuations have provided answers to questions on property sharing and distribution, satisfaction of claims and settlement of debts, as well as the determination of values for purposes of a sale or transfer transaction. Valuations became the exclusive preserve of valuers whose price estimates were looked upon as gospel truths and accepted without question and used as a guide as if these are the results of the interplay of the forces of demand and supply (RICS International Valuation Faculty Board, 2008). While this group of people attained the status of an authority on property valuation, the nature of their work was not subjected to a closer scrutiny and their outputs were just treated as a professional advice, although devoid of any professional responsibility.
With the huge volumes of transactions involving property and equipment and the magnitude of losses and gains resulting from these transactions, attention has now been focused on the methodology and assumptions in coming up with these valuation estimates. Although many areas were considered, uncertainty in property valuation (French, N., 2007) stands out as an area that should be properly addressed to make these valuations not only reliable but also a perfect guide for future transactions. These valuations are usually extrapolation of the past and there is no assurance that these will surely be expected to be the present and future values.
The Problem
Why is there a need for current or updated property valuation? Does the figure provided by property valuers truly reflect the real value of the subject property? Or is it because the methodology used in their computation is based on an assumption that is not only unrealistic but also based on a trend that would not be applicable to the conditions likely to prevail in the future?
The property valuation that is currently being adopted is the result of a methodology that is anchored on uncertainties on what will happen in the future. The uncertainties are not just limited to uncertainties used by different valuers but also by even a single valuer (French, N., 2007) who has to use different price scenarios just to be able to widen the horizon and hopefully capture all possible price ranges for a subject property. Are there really ways to eliminate this uncertainty factor? Should estimates be made only under conditions of uncertainty? If this uncertainty could not be eliminated, is there a way to minimize its impact and not reduce the use of property values into mere guesswork and a hit-and-miss exercise?
Analysis of the Problem
Most decisions are made under conditions of uncertainty. Property valuations are sort of mathematical exercises on property values under simulated conditions which pertain to the future. By uncertainty, reference is made to the fact that these prices may have been experienced in the past and there is a probability that it would be encountered in the future. If this would not prevail in the future, a loss may result and this would be the risk associated with this undertaking (French, N., 2007).
Uncertainty is the lack of assurance that something similar will happen in the future. Usually, projections on future events are based on past experience or occurrences and probabilities are assigned and considered as weights on what is the recommended average figure (French, N., 2007). It is also possible to determine future scenarios and assign probabilities to these scenarios and average these out to arrive at a recommended figure. The probabilities in the latter case are considered as subjective probabilities and may just result from a personal bias of the person using them.
Valuations are the result of the interplay of the forces of demand and supply of property. However, the volume and frequency past transactions may not be that many which could provide a more realistic and valid basis for making estimates of property values. Also, property values arrived at by discounting future cash flows from the use of the property (French, N., 2007) may be based on certain assumptions on future events which may not likely prevail in the future. Because of too much uncertainty on the events likely to happen in the future, accuracy of the valuations could be badly affected.
Accuracy of property valuations is determined by the variance of the actual prices from the estimates (RICS, 2002). This assessment is available only when there is actual sale or disposal of the property and actual gains or losses are determined. Prior to actual sale in the succeeding period, determination of the accuracy of the property values is not possible. Also, the period from date of valuation to date of sale or disposal may allow other factors to come into play that affect property values and these were not considered in making the estimate.
One of the uses of property values is in an exchange transaction involving a property and company shares of stock. When the exchange is made, a property valuation has to be determined and agreed before the transaction has to be consummated. Once this transaction has been made, both the company and the investor will record their respective asset values (based on the valuation of the property exchanged for the company shares of stock). As to whether this valuation is accurate, only subsequent events will tell. The subsequent sale or disposal resulting in a gain or loss will help determine the accuracy of the property valuation made at the time of the stock-for-property swap. Or a subsequent valuation will help determine whether the earlier valuation was accurate. However, this may not result in valid conclusions on accuracy because of some factors or developments during the intervening period may have a major impact on the latest valuation.
These factors may consist of depreciation or decline in value due to wear and tear, technological obsolescence or developments in the area that may have resulted in either appreciation or decline in the values of the properties. These factors may not have been considered in the making the earlier estimates on property values and it would not be proper to evaluate the accuracy of property valuation which did not consider this in the computation.
Steps to Address the Problem
Uncertainty is a problem that is here to stay. Certainty on what will happen in the future is still not in the realm of human thinking. Guesswork is still the best that human beings could make and the intelligent guesswork may be an improvement but still short of total elimination of uncertainty.
The probability theory has been used to address this problem of uncertainty (French, N., 2007). This approach may give a semblance of objectivity because this is based on frequency distribution of actual events. However, the reliability of this theory may be limited only in a normal distribution of values which may not be applicable to certain kinds of property. This approach is objective because it is based on actual values and past experience. However, the historical figures may not be the same as would be encountered in future situations.
The normal distribution and accompanying computations of median, mean and mode have been touted as a quantitative tool in dealing with this problem of uncertainty (French, N., 2007). While events whose averages are represented by the computed mean, median and mode did happen in the past, the likelihood of similar outcome is less than assured in the future. The past market conditions may differ markedly from the future situations, thus making extrapolations from the past not representative of the future market conditions.
The Monte Carlo simulation method was introduced as a quantitative technique to overcome the shortcomings of the other quantitative tools (French, N., 2007). As simulation model, the Monte Carlo method can come up with a property value estimate that would be as close to the actual figure. However, just like any quantitative model, the Monte Carlo is limited in its use because of its major assumption on the range of possibilities that are considered in its model. This quantitative technique therefore would not eliminate the uncertainty but only attempts to increase the reliability of the output of the model as a more acceptable estimate of property values.
Under the Monte Carlo model, the property values of various valuers are combined and averaged out. The individual valuers are first required to come up with a probability distribution of their own individual estimates and averages for individual valuers are then computed before combining these with the other valuers for subsequent averaging.
While use of historical data may be more objective, the use of future cash flows and discounting them to their present values is another approach in coming up with a more current property valuation (French, N., 2007). The major drawback of this approach is the subjectivity in coming up with the future cashflows and the discount rate used in the computation of present values. Since this approach is on a selected property basis and for a specific company, the inputs for this valuation are usually company-provided data which could very well work for the interest of the company.
While the foregoing activities have been undertaken as the most common approaches to property valuation studies, other developments have been made or are in their initial stages which tend to improve the reliability of the property values. While uncertainty still remains to be a factor in coming up with these property values, steps to reduce the impact of this factor are already on its way or are being considered. These activities are being undertaken by other parties/organizations in coordination with the property valuers.
The unique position of the property valuers has been acknowledged by accounting standard-setting bodies, government regulatory agencies, banks and businessmen. While there has been total agreement on who should conduct this property valuation services, the valuers should strive to arrive at a common ground in terms of methodology or common standards of valuation and maintaining a data bank of valuations made for specific types of properties, without unnecessarily divulging names of owners (Carsberg et al, 2002). While in many countries, the property valuers are not professionally liable for their opinion on property values, concrete steps in making them professionally responsible for their work should be considered to ensure objectivity in conducting the property valuation study and improve the reliability of the valuation report. The required professionalization of the work of the property valuers could be handled by a government regulatory agency or a self-regulating organization of the property valuers.
Increasing the frequency of property valuation has been mandated by the accounting-standard setting bodies in connection with the required impairment test for property and equipment. Properties which are subject to frequent changes in market prices are now required to be revalued at least once a year. A revaluation is even allowed on a rolling basis as long the valuation is completed within a short period of time. The increase in frequency of property valuation has narrowed the period to be considered in making extrapolations or projections for property values, thus improving the accuracy of the property values.
A common data bank could be set up for the property valuers (Carsberg et al, 2002). If the property valuations made are submitted to a common data bank for valuers, the valuers could be guided and independently checked in making the valuation because averages could be computed on most recent valuations submitted by valuers. The property valuation reports should indicate both the valuation of the valuer and the average figures as provided by the common data bank.
Like the rotation of external auditors, the requirement for a rotation of valuers could ensure independence and also improve the reliability of the property values. A rotation of every three years could serve as a counter-check on the accuracy of the previous valuations made. Independence policies similar to external auditors could be applied to property valuers in their dealings with their clients (Carsberg et al, 2002).
The government has really a big role to play in reducing the impact of the uncertainties in property valuations. While the tax authorities have their own valuations in assessing property taxes, these have to be updated more often to make these figures approximate current property values. In a share-for-property swap, a property valuation should be required not only at the time of approval by a government agency but also in the succeeding two years to check on possible issuance of watered stock. Accuracy of property valuations is determined only when these are benchmarked against figures in succeeding valuations or valuations used by the government for property tax purposes. Increasing the frequency of updating the benchmark figures encourages the company to have more reliable figures for their property valuations.
Certainty of future events is still an elusive thing for financial planners and property valuers. With the growing complexities of the economic and political environment, the number of factors to be considered has increased and has made the traditional tools or models obsolete or inadequate to handle these factors. Reducing the impact of uncertainty in decision-making is still a never-ending game but progress has been made in minimizing its impact. While uncertainty could not be eliminated, its impact could be contained or minimized. This progress is shown in the fact that property values are no longer way off the mark when compared with benchmark figures.
Conclusion and Recommendations
Property valuation is usually made under conditions of uncertainty. The major premise in conducting the valuation study is that uncertainty could not be eliminated but its impact could only be minimized. To improve the reliability of the property valuations, present and proposed solutions have been zeroing on increasing frequency of valuations, shortening the period for making extrapolations/projections and checking for accuracy. The need for checking the accuracy has been made possible by regular updating of benchmark figures provided by succeeding valuation studies or by the government agencies.
Addressing the problems of uncertainty has been a combination of quantitative methods and exercise of regulatory functions. While quantitative methods have made significant progress, their widespread adoption has been hindered by their complexity and limitations in use. The organizations exercising regulatory functions could play a bigger role by making the business reporting practices more supportive of the need for more frequent and reliable property valuation. While in the past, property revaluations were more at the discretion of the company, the present reporting standards now require them to have more frequent revaluations and subject their property to regular impairment tests.
Unfavorable impact of uncertainty results in losses to the company. To address this possible unfavorable impact, the company has to adopt risk management techniques to minimize this risk. Risk management techniques are still considered a new concept in some companies and their adoption would depend much on the amount of the possible losses and its probability. The last characteristic has been addressed by the probability theories whose use in property valuation in a way contributes to minimizing this risk.
