An Evaluation Of Valuation Standards And Property Valuation Practice

An Evaluation Of Valuation Standards And Property Valuation Practice

Abstract

This study evaluated the valuation standards and property valuation practice in Nigeria. The study employed a descriptive method of research design. Primary data were sourced through structured questionnaires administered to practitioners in Ondo metropolis, while secondary data were mainly from valuation reports prepared by valuers (appraisers) operating within the study area and documents from the regulatory bodies. Using the yardstick of transparency, rationality and consistency-theuniversalhallmarksofreliableassetpricing;andtheInternational Valuation Standards Committee’s as well as the Royal Institution of Chartered Surveyors’ recommended “minimum content of valuation report”, the study revealed that the real estate valuation practice in the country presently falls short of international standards and best practices. While acknowledging remedial steps that were recently put in place, the study recommended other measures that will revolutionize the local practice. These include formation of bigger firms, a more proactive regulatory framework and a comprehensive review of training curricular. Substantial amendments to the present national valuation standards and guidance notes to reflect and accommodate the peculiarity and the particular needs of the local market place with adequate measures for enforcement/sanctions should also be considered. Above all, practitioners must be willing to embrace necessary changes in practice.

Table of Contents

Chapter One

1.0 Introduction

• 1.1 Background of the Study
• 1.2 Statement of the Problem
• 1.3 Objectives of the Study
• 1.4 Research Questions
• 1.5 Hypothesis
• 1.6 Significance of the Study
• 1.7 Definition of Terms
• 1.8 Organization of the Study

Chapter Two

2.0 Literature Review

• 2.1 Conceptual Framework
• 2.2 Form and Contents of Valuation Standards Manual
• 2.3 Who Sets Valuation Standards?
• 2.4 Valuation Standard and Practice in Nigeria
• 2.5 An Overview of the Nigerian Real Estate Valuation Practice Environment
• 2.6 Nigeria Adoption of Best Practice And Compliance to IVS

Chapter Three

3.0 Research Methodology

• 3.1 Research Design
• 3.2 Study Area
• 3.3 Population of the Study
• 3.4 Sampling of the Study
• 3.5 Instrumentation
• 3.6 Reliability
• 3.7 Validity
• 3.8 Method of Data Analysis

Chapter Four

4.0 Results and Discussion

Chapter Five

5.0 Summary, Conclusion and Recommendations

• 5.1 Summary
• 5.2 Conclusion
• 5.3 Recommendations
• References
• Appendix

Chapter One

1.0 Introduction

1.1 Background of the Study

Valuation standards are important as they help to encourage transparency and reliability. There has been much focus on valuation accuracy in recent times. It is argued that the procedures and methods employed by Nigerian valuers are marked by flaws and hence not reliable. This study examines the compliance level of Nigerian Estate Surveyors and valuers to the valuation Standards as part of the solution to valuation in inaccuracy and variation.

The absence of standard connotes lack of professionalism and constitutes a potential source of abuse, mediocrity, complacency and conflicts. This study is concerned with the credibility of proper valuation practice in Nigeria. Valuation standards provide quality control measure on how to undertake and report on valuations. The aim of this study is to examine the compliance level of property valuation practice in Nigeria with the International Valuation Standards which is the highest valuation standard setting body. The data collection instrument used was the survey questionnaire and statistical analysis was done to ascertain the validity of the hypothesis. Using data gathered through structured questionnaire and from valuation reports, this study appraises the position of the International Valuation Standards and the current practice of property valuation.

The application of technical and professional standards is one element which distinguishes a professional from a trade or service industry. Absence of standards connotes lack of professionalism and constitutes a potential source of abuse, mediocrity, complacency and conflicts. The Webster Reference Dictionary defines standard as “anything taken by general consent as a basis of comparison, or established as a criterion, a grade or level of excellence or advancement generally regarded as right or fitting”, while standardization is defined as steps taken “to conform to or regulate by a standard, bring to or make of any established standard size, shape, weight, quality or strength to compare; with or test by standard” (Webster, 1961). Standards therefore comprise technical specifications and other prescribed materials designed to be used consistently as a rule, guideline, or definition and are aimed at helping to simplify and to increase the reliability, comparability, and effectiveness of goods and services (BSI, 2006). In professional parlance, standards are a summary of best practice created to ensure reliability, comparability, and effectiveness of servicesprovided. In particular, valuation standards serve as professional benchmarks or beacons enabling members to provide reliable valuations that meet the financial reporting requirements of the business community. Their purpose is to ensure that valuations produced by members achieve high standard of integrity, clarity, and objectivity and are reported in accordance with recognized bases that are appropriate for the purpose. Standards are imposed by personal conscience, by national professional institutions or bylaw.

The subject of standards in real estate valuation in Nigeria has been addressed in parts by a few studies (Babawale, 2005; Babawale and Koleosho, 2006; Ogunba and Ajayi, 2003, 2007). Both Babawale (2005) and Babawale and Koleoso (2006) examined the implications of globalization on real estate valuation practice in Nigeria; while Ogunba and Ajayi (2003, 2007) attempted to measure the response of Nigerian Valuers to increasing clients’ sophistication in investors’ requirements in terms of valuation accuracy, rationality, and risk analysis; using what the authors described as UK’s pattern of transition towards investors-focused sophistication as basis.

The internationalization of real estate service, the development of common indices for the analysis of pooled property data, and particularly the merger of property consultancy companies in the UK with their American counterparts acted as a driver for the development of common valuation standards (Mackmin, 1999). McParland et al., (2002) also observed that the advent of property performance index series is shown to be a major factor influencing the harmonization of valuation methods and standards. For instance, the US National Council for Real Estate Investment Fiduciaries (NCREIF) has contributed to the development of real estate standards in the US through its quarterly property index which shows real estate performance returns used as an industry benchmark to compare an investors own return against the industry average (Milgrim,2001). The IPD/Drivers Jones (now IPD/RICS), Lang Lasalle Property Performance Analysis System (PPAS) are some of the UK’s prominent counterparts. observe international Accounting Standards are other factors that have made the need for common standards for valuation more urgent and compelling. Milgrim (2001) observed that the emerging global client is driving international standards in accounting, banking and valuation. Valuations that will be used for lending purposes, financial reporting of multinational companies, cross-border property investments performance comparison or securitization of real estate, can therefore be produced only by a valuation profession that conforms to international standards of professional education, competence and practice.

This study is concerned with the credibility of proper valuation practice in Nigeria. Valuation standards provide quality control measure on how to undertake and report on valuations. The aim of this study is to examine the compliance level of property valuation practice in Nigeria with the International Valuation Standards which is the highest valuation standard setting body. The data collection instrument used was the survey questionnaire and statistical analysis was done to ascertain the validity of the hypothesis. Using data gathered through structured questionnaire and from valuation reports, this study appraises the position of the International Valuation Standards and the current practice of property valuation.

1.2 Statement of the Problem

Lack of standard constitutes the potential source of conflicts, abuse, mediocrity and complacency to the application of technical and professional standards from elements as to distinguish a professional from a non-professional in the service industry. Therefore, standards comprise of technical stipulation and other approved items intended to be used constantly as a rule, principle or designation which are designed at helping to abridge and boost the dependability, comparability and effectiveness of goods and services (British Standard Institute (BSI), 2006).

The pertinent question here is. how has the new valuation standards been beneficial to the Nigerian Valuation Practice as it effects the Estate Surveyors and Valuers, and as such, what’s their response to this global change in the adaptation of the International Valuation Standard as its being presently viewed at working towards the realization of the International Valuation Standard and best practice. Generally, acceptable valuation principle, best practice and due diligence measure, has been prescribed to Valuers for the valuation of various classes of assets and liabilities to cater for crossborder clients satisfaction through the wide spread and effective implementation of the International Valuation Standard as recommended solution to the valuation short falls as earlier stated. In this regard therefore, this study examined the valuation standards and property valuation practice in Nigeria.

1.3 Objectives of the Study

The main objective of the study is to carry out an evaluation of valuation standards and property valuation practice in Nigeria. Specifically, the study sought to examine the:

1. Most frequently used method(s) to value commercial/residential properties among firms.
2. Most frequently used method to estimate accrued depreciation among firms.
3. Method most often used to estimate yields among firms.
4. Principal valuation standards manual in use among firms.
5. Compliance level with minimum content among firms.

1.4 Research Questions

1. What are the most frequently used method(s) to value commercial/residential properties among firms?
2. What are the most frequently used method to estimate accrued depreciation among firms?
3. What is the method most often used to estimate yields among firms?
4. What are the principal valuation standards manual in use among firms?
5. What is the compliance level with minimum content among firms?

1.5 Hypothesis

The following hypotheses were formulated to be tested at .05 level of significance;

• HO1: There is no significant relationship between valuation standards and property valuation practice
• HA1: There is a significant relationship between valuation standards and property valuation practice

1.6 Significance of the Study

The huge sums of money invested in real estate on an annual basis are enormous. The current happenings in the US with regards to bubble burst from the mortgage sector of the country’s economy are already affecting the fortunes of other countries. To avoid such risks in Nigeria, this study serves as an eye opener for estate surveyors and valuers in practice, other professionals and stakeholders in the real estate business as to the extent of risk they are about to take.

Valuer’s clients are handicapped in decision making by the absence of adequate and reliable information in the property market, unlike the capital market where values of securities can be imputed quickly and easily from the prices at which identical assets trade in regular active markets. Information about market values in the property market is much more difficult to ascertain due to the heterogeneity of properties, the infrequency with which they trade, and the difficulty in observing or tracking transaction prices due to secrecy. Additionally, the decentralized nature of most property markets give rise to a dispersion of privately agreed transaction prices about notional market values. The implication of this is that capital market operators and portfolio managers require valuations as a proxy for price. The Nigerian Institution of Estate Surveyors and Valuers therefore needs to encourage research to determine the veracity of inaccuracy claims and if proven, to take corrective action. The present research is in this direction, in an attempt at assisting the profession to justify its property price predicting relevance.

1.7 Definition of Terms

Evaluation:

Is a systematic determination of a subject’s merit, worth and significance, using criteria governed by a set of standards.

Valuation Standards:

Are codes of practice that are used in valuation OF businesses, organizations or industries.

Property Valuation:

Is the process of developing an opinion of value for real property.

1.8 Organization of the Study

This study is divided into five chapters. The first chapter is the introduction which contains the background, research problems and objectives. The second chapter is the literature review and the third chapter is the research methodology. In the fourth chapter, the researcher analyses the data and discusses the results. The fifth chapter is the last chapter which presents the summary, conclusion and recommendations.

Chapter Five

5.0 Summary, Conclusion and Recommendations

5.1 Summary

The study sought to carry out an evaluation of valuation standards and property valuation practice. From Table 4.1, valuation firms in the study area as represented by the 250 samples were dominated by small scale firms, localized practice, operating mainly as sole proprietorship, (limited number or no partnerships, limited or unlimited liability firms). None of the sampled firms is a specialist firm; all professional members of staff tended to carry out a range of real estate consultant services, of which valuation was only one. In fact, personal interviews confirmed that in several cases, valuation was subsidiary to property agency and management. Given the predominance of small scale firms, only a limited number of firms have research units (19 per cent), maintain a functional library (20 per cent), or maintain a formalized data bank (43 per cent). It also follows that only few of the firms are capable of investing in valuation software, have capacity to sponsor continuing profession development or other forms of training, or human capital development that promote best practices.

The results of the study also revealed the apparent lack of transparency and consistency in accounting for accrued depreciation where the cost method is used. Generally, it appears that accrued depreciation is subjectively estimated based largely on rule of thumb. The accuracy of such subjective measures depends largely on valuer’s individual skill and experience, availability of relevant data and the ability to interpret and apply the data appropriately. The research efforts into various aspects of building performance and cost estimates that would make the cost method more pragmatic and reliable, is presently wanting.

5.2 Conclusion

The comparison method of valuation was widely employed but with little evidence of a rigorous application like the use of more explicit and rational ‘grid adjustment’ technique, or the hedonic (regression analysis). The only research so far sponsored by the NIESV (Igboko, 1992) on valuation methodology, concluded that the investment methods of valuation were capable of predicting market values accurately but if it is applied with current yield. That is, if yields were revised regularly to reflect changing investors’ expectations about rental growth especially in periods of inflation. The results of this study however showed that where the investment method is employed, the conventional ‘term and reversion’ is the only approach employed. That is, none of the respondents employed any of the growth explicit rational models – the rational, the equated yield, or the real value model. The conventional ‘term and reversion’ has been criticized on a number of critical grounds. Among others, the approach employs the initial yield rather than the overall yield (equated yield), making cross comparison between investment alternatives rather difficult. According to Baum and Crosby (1995) prior to 1960, investors in the UK had little faith in continuing rental growth, thus, investment valuation using initial yields which mirrored the no rental growth expectation was appropriate at the time making the yield from property investment at that time comparable with yield on gilts. However from 1960, rising rental incomes made investors to begin to expect rental growth which informed the changing the capitalization rate from being equated yield (IRR) reflecting no growth to a much lower “all risk” yield which adequately capture investors’ expectation of growth potential. The changes in investors’ expectations without a corresponding change in investment valuation approach were at the centre of Greenwell and Trott criticisms. Both the Greenwell (1976) and the RICS sponsored Trott (1980), noted that the conventional approach lack transparency, rationality and consistency. Trott (1980) put forward the equated yield technique (a variant of the Discounted Cash flow Analysis) as a remedy, which has since gained wide acceptability in the UK practice. From the results of this study, Nigerian valuers are yet to embrace this or any other remedy Furthermore, the comparison method may be the least appropriate in Nigeria today given the present state of the property market where comparable evidence of values (especially sale price) is hardly available in the right quality and quantity (Dugeri, 2011). The poorly developed mortgage system, among other factors, makes the rental market rather than the sales market, the more active and organized. The widespread use of the comparison method in the circumstance therefore put a question mark on the reliability of valuers’ estimates of property values. End users of valuation reports in Nigeria, notable bankers and accountants, considered the conventional methods as “shrouded in mystery” (Ogunba and Ajayi, 1998).

The dominance of conventional techniques despite their recognized limitations raises questions on the level of sophistication of valuation techniques and skill among valuers in the study area. It also raises questions on the practical problems of applying the more explicit and rational DCF-based techniques given the poor valuation environment and particularly the problem of reliable data. A large proportion of the valuers in this study apparently do not appreciate that the physical attributes alone do not account for the value of a property. Thus, while majority of the valuation reports include copious description of the physical characteristics of the property being appraised; description of legal and economic characteristics, particularly the economic characteristics, are generally scanty or completely missing. Value opinions are therefore neither persuasive nor traceable.

In summary, the result of the study generally portrays the Nigerian practice as evolving within a weak regulatory framework; a rather closed and difficult valuation environment; and the local practice as being rather too sluggish in catching up with the emerging global trends, international standards and best practices.

5.3 Recommendations

The regulatory bodies (NIESV and ESVARBON), would need to beef up local capacity building through formal and informal education, continuous professional development; acquisition of industry based software, a central databank, research and effective dissemination of research findings. Measures must be taken to encourage growth of bigger firms through mergers and acquisitions. The industry is presently too fragmented to make the desired impact and take advantage of emerging opportunities. Big and medium sized firms would be in a better position to fund research, support a standard library, promote specialized skill, fund staff training and acquisition of necessary technology, and afford better geographical spread, among others. Standardization of information set is central to consistent, transparent and rational valuations. The continuing development programme at the state and national level should be used to introduce and encourage Though the regulatory body has tried to put in place a document of standard practice, the document is still unpopular as it is barely used by practitioners. The manual, which is almost a verbatim copy of the IVSC version, should be revisited to accommodate local contents to make it more relevant, and to enjoy wide acceptability and easy enforcement.

There are encouraging developments. Recently, the Nigerian Institution of Estate Surveyors and Valuers established various foundations including one for valuation and a separate one for plant and machinery reminiscent of the RISC’s. It also established a research foundation to liaise with academic institution and valuation consumers for purpose of funding property market research. A Real Estate Training Institute has also been established for continuous development of practitioners. Moreover, the obsolete valuation standards prepared in 1985 have been replaced in 2006 by a more IVSCcompliant valuation standards. The new constitution of the NIESV which was ratified at the 2012 Annual Conference in Abuja now permits firms to operate with pseudo names instead of erstwhile practice whereby firm’s name must include the surname of the principal partner(s). This development is expected to promote growth of bigger firms and encourage partnership with foreign experts. As earlier noted, the recently promulgated Financial Reporting Council Act, 2011, is expected to strengthen existing regulatory framework by providing necessary legal platform for effective monitoring and enforcement of compliance with international standards and best practices. The academic community in Nigeria is already taking a lead in the vanguard for rationality, accuracy and consistency in real estate valuation, by under taking series of empirical studies on valuation standards and valuation accuracy (Ogunba and Ajayi, 1998; Ogunba, 2004; Babawale, 2008; Ayedun, 2009; Babawale and Ajayi, 2011; Babawale and Omirin, 2011; Ayedun et al., 2011).

The ongoing measures as well as the steps that are here suggested would yield the desired improvements in practice standards only if individual valuers and valuation firms avail themselves of the benefits and are willing to adopt necessary changes in practice. Regrettably, earlier studies have identified individual behavioral characteristics of the valuers as the main cause of valuation inaccuracy (Babawale and Omirin, 2011; Parker, 1999), while Wyatt (2003) noted that even in countries like Britain where the profession has tried to enforce more rigorous mandatory standards backed up by detailed guidance notes, valuers still fall below the required standards.

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