An Evaluation of Valuation Standards and Property Valuation Practice
CHAPTER ONE
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:
- Most frequently used method(s) to value commercial/residential properties among firms.
- Most frequently used method to estimate accrued depreciation among firms.
- Method most often used to estimate yields among firms.
- Principal valuation standards manual in use among firms.
- Compliance level with minimum content among firms.
CHAPTER TWO
LITERATURE REVIEW
Valuation standard
The application of valuation standard has drawn a very clear distinction between its professional and the non professional approach. The absence of standard will therefore connote lack of professionalism as such constitute abuse, mediocrity, complacency and possible conflict (Babawale. 2005). Standard has been defined by the webstar reference dictionary as “Anything taken by general consent as a basis for comparism 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 lest by standard’ (Webstar.1961). Standard must be specialized and of other endorsed materials intended to be utilized when in doubt, rule or definition as a guide to streamline and accomplish dependability, similarity and the adequacy of administration gave. English Standard Institute (BSI 2006). In proficient speech, gauges arc outline of best practice made to guarantee unwavering quality, similarity, and adequacy of administrations gave specifically, valuation gauges fill in as expert benchmarks or reference points empowering individuals to give dependable valuations that meet the money related revealing prerequisites of the business group (IVSC, 2007). The design is to guarantee that valuations delivered by individuals accomplish exclusive requirement of uprightness, clearness, and objectivity and arc accounted for as per perceived bases that arc proper for that reason (Babawale. 2005), Measures arc forced by individual inner voice, by national expert establishments or by law. (Babawale, 2005; Babawale and Koleoso. 2006; Ogunba and Ajayi, 2003, 2007). Babawale (2005) analyzed and mostly tended to the subject of standard in land valuation in Nigeria. Koleoso (2006) inspected the ramifications of globalization on land valuation hone in Nigeria; while Ogunba and Ajayi (2003, 2007) endeavored to gauge the reaction of Nigerian Valuers to expanding customers “sophistication in financial specialists “requirements as far as valuation exactness, sanity, and hazard investigation. A definitive objective is to find out the degree to which Nigerian valuation rehearse is reacting to global standard and best practices from the perspective of straightforwardness, levelheadedness and consistency. Such examination is needful given the focal part of solid valuations in the genera! working and proficiency of the property and money related markets. The animating pace in the globalization of speculations advertise additionally underscores the requirement for valuations that are predictable, straightforward and that are promptly comprehended, material and acknowledged universally (IVSC. 2003).
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The study employed a descriptive research design method in order to evaluate the valuation standards and property valuation practice.
Study Area
The study area is Metropolitan Lagos, Lagos State, SouthWest Nigeria. Lagos State is one of Nigeria’s 36 states. Lagos metropolis accounts for 37 per cent of the land mass of Lagos State but hosts about 85 per cent of the population giving an average population density of 20,000 persons per square kilometer.
The metropolis’ present population is estimated at 17 million which confers on it the status of a mega city and is projected to be the third largest city in the world by the year 2015.
Lagos state accounted for 11.7 per cent (N 1, 700.97 billion) of the national GDP second only to the oil-rich Rivers state. The state commands 65 per cent of Nigeria’s commercial activities, 60 per cent of national industrial investment and foreign trade, 40 per cent of manufacturing value added, 48 per cent of building and construction activities, and 55 per cent of wholesale and retail trade (Lagos Indicator, 2009).
Lagos is considered the most appropriate area for this study for a number of reasons. First, despite the fact that the seat of the Federal Government moved from Lagos to Abuja in 1991, Lagos metropolis has remained the nerve centre of the nation’s commercial, industrial, and property investment activities.
Furthermore, available records with the regulatory bodies – the Nigerian Institution of Estate Surveyors and Valuers; and the Estate Surveyors and Valuers Registration Board of Nigeria – showed that the number of registered firms of Estate Surveyors and Valuers in Nigeria as at January 2009 was 779, out of which 415 (53 per cent) have either their head office or at least a branch office within Lagos Metropolis (Dugeri, 2011).
CHAPTER FOUR
DATA ANALYSIS AND DISCUSSIONS
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
Conclusions
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 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 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.
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.
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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