- Background to the Study
It was in 1987, in the wake of some well publicized research works by actuaries Hager and Lord that Drivers Jonas first sponsored Investment Property Databank (IPD) to carry out detailed research into valuation accuracy in the United Kingdom. The Royal Institution of Chartered Surveyors (RICS), as the valuers’ professional body, later took over the role of sponsor. In doing so, they were adopting one of the principal recommendations of Sir Bryan Carlsberg’s Working Party on valuation practices.
In 1985, Udo-Akagha, one of the leading estate surveyors and valuers in Nigeria, while writing a foreword to “Guidance Notes on Property Valuation” noted that;
“there ought to be no reason why two or more valuers valuing the same interest in a property for the same purpose and at the same time should not arrive at the same or similar results if they make use of the same data and follow the same valuation approach”.
In the same vein, in 1998, an editorial on page 2 on “property valuation and the credibility problems” in The Estate Surveyor and Valuer, the professional Journal of the Nigerian Institution of Estate Surveyors and Valuers stated inter alia that
“the valuation process has been the focus of recent debate and controversy both within and outside the profession as cases of two or more valuers giving different capital values with wide margins of variation for the same property abound”.
Comments of this nature have led many to ask whether estate surveyors and valuers are interpreters or creators of value. From the above statements, it is evident that the twin problems of inaccuracy and inconsistency (variance) in the valuation practice exist in Nigeria. Even in developed countries such as Britain, Australia, Canada and USA, the valuers’ estimates, methods and processes have been increasingly criticized for over the past thirty years as clients seek advice in increasingly sophisticated investment markets (Baum and Macgregor, 1992).
In the same vein, there has also been a focus on the seeming inability of valuation estimates to accurately represent/interpret market prices or serve as a security for bank loans. Bretten and Wyatt (2002) observed that valuers do not operate with perfect market knowledge while valuers in many instances follow clients’ instructions, analyze available information, make judgments and respond to different pressures from stakeholders when preparing a valuation in a market atmosphere of heterogeneity. However, the study of valuation accuracy should be a continuing one as is the case in the United Kingdom (UK) where the RICS of late teamed up with the Investment Property Databank (IPD) to produce investigations into valuation accuracy in Britain on a two (2) yearly basis.
The effort in this work will accordingly be the study of valuation accuracy and consistency and the factors influencing their occurrences, to cover a more up to date time period with a view to validating/invalidating, expanding and updating the results in the pioneering efforts of Ogunba (1997), Ogunba and Ajayi (1998) and Aluko (2000). Accordingly, the present effort will be to deal with valuation of properties in the Lagos metropolis which is regarded as the most active investment property market city in Nigeria.
1.2 Statement of the Research Problem
Property valuation performs an essential role in property transactions. It provides advice on prospective purchases and sales in addition to supplying material information to underpin property lending decisions. Moreover, since the 1960s and 1970s, property valuations have been used to proxy the exchange price of property investments for performance measurement purposes. This more recent use of valuation indices is a major difference between the property performance measurements and the performance measurement of other investment media markets wherein measurement are undertaken by reference to market transactions.
The differences have led some analysts to argue against property as a portfolio asset, which in turn has led to the under-representation of property in many portfolios. Moreover, the lack of confidence in the use of valuation-based indices might be evidence that the portfolio industry does not readily accept valuations as accurate indicators of prices (and hence returns) in the absence of accuracy studies proving that they are proxies for each other.
Ajayi (2003) noted that increased valuation accuracy and consistency are the demand of the more sophisticated and enlightened clients in the emerging property market of today and the property market has seen remarkable change within the past forty years. Europe and the US have witnessed the emergence of institutional investors, the management of investments on portfolio basis and the recent advent of new property finance methods including securitization and unitization. Clients are now getting much more sophisticated and analytical in their decision making approaches and therefore increasingly require more accurate and consistent valuation estimates from their consultant valuers.
While Accountants, Stockbrokers and other financial consultants have progressively refined their financial analytical techniques to meet and satisfy their changing clients’ expectations, it is rather unfortunate that the property professionals – represented in Nigeria by the Estate Surveyors and Valuers – have been rather slow and lukewarm in their attitudes and approach to the required accuracy changes in valuation practice thereby resulting into complaints from clients about valuation estimates (Ojo, 2004).
The issue of accuracy is also imperative because the profession as it is today is facing stiff competition in all facets of its traditional areas of practice, taking into consideration the fact that the estate agency aspect of the profession has become an “all comers” affair and moreover, that Engineers, Lawyers, Facility Managers and even some stark illiterates (“quacks” of the profession) do engage in property management functions. At the same time, Quantity Surveyors are agitating to take-over the insurance valuation aspect of the profession, whilst Engineers are also seeking to be plant and machinery valuers. In the face of such stiff competition, the estate surveyors can ill afford to be found negligent in the accuracy of their work.
The implication is that the valuation surveyor is faced with both increasing client requirements for accuracy as well as stiffer competition from related professionals. These twin issues of stiff competition and consistency cry out, as it were, for the valuer to respond with pace setting levels of accuracy, and sophistication in his valuation advice. The problem of inaccuracy in valuation manifested itself recently in the case of the valuation of the assets of Nigeria Telecommunication Limited (NITEL) for privatization/disposal purposes when members of staff of the company as well as the interested stakeholders and members of the public in Nigeria openly voiced out their complaints against the excessively low valuation figures/estimates the estate surveyors ascribed to the assets of the company. It was on the strength of such complaints that the then Federal Government under President Olusegun Obasanjo canceled the whole privatization exercise and ordered a re-valuation.
Other instances of valuation estimate inaccuracy according to Ojo (2004) came from financial institutions who continuously complained about the accuracy and reliability of mortgage valuation figures supplied them, which they considered as under-representing the values of such foreclosed collateral securities. He went further to note other instances of alleged inaccuracy which were being investigated by the Professional Practice Committee of the Nigerian Institution of Estate Surveyors and Valuers.
In addition, Ogunba (1997) and Ogunba and Ajayi (1998) alluded to the fact that the average layman nowadays casts doubt on valuation estimates emanating from estate surveyors and valuers. No matter how unjustifiable the criticisms might be, that estate surveyors and valuers are often influenced to hike their valuation estimates because of the need to increase or generate their fees, such criticisms or allegations are a pointer to the fact that inaccurate valuation estimates call to question the valuation skill, integrity and competence of Estate Surveyors and Valuers especially in their core area of practice. From the legal perspective, there is danger that valuers in Nigeria are increasingly found liable for negligence in cases where their valuation figures or estimates mislead unsuspecting and uninformed clients, notwithstanding the exclusion clauses often entrenched in Nigerian valuation reports (Okoror, 1995).
Besides, there is the looming possibility that the property investing public, faced with continuously unreliable estimates, may decide to dump the services of estate surveyors and valuers in favour of services from other consultants such as the Accountants, Financial Analysts, Engineers or Quantity Surveyors who, they think may be able to provide more realistic and reliable estimates. It is therefore important for estate surveyors and valuers to wake up from slumber and take the issue of valuation accuracy and consistency more seriously.
Other envisaged consequences of continuous and unchecked inaccuracy and inconsistency are adequately summarized by Aluko (2004) as:
- Constraints on property performance analysis due to uncertainty surrounding valuations. This may be damaging to the operation of both the property market and property indices;
- Adverse influence on the relevance of the valuer because if a valuation can only have a limited likelihood of accuracy, the client may question why a valuation is necessary at all;
- Adverse influence on the credibility of the valuer as inaccuracy in valuation means that professional advice would be meaningless as the whole basis of property advice rests on the assumption that valuations are a good proxy for prices; and,
- There could be damage to confidence imposed on the property market.
There seems to be relatively sparse research work in Nigeria on valuation accuracy, reliability and credibility as against such studies in the UK, US, Canada and Australia especially in the past three decades. Also, in the face of the globalization of efforts in this very important and core area of the profession; Nigeria and the rest of Africa cannot afford to feel unconcerned and lukewarm if they want to be relevant in the emerging scheme of things.
In the face of such increasing needs for accuracy, reliability and credibility in valuations, we cannot therefore afford to fold our arms in the face of these problems, observations and criticisms and expose ourselves and the profession to ridicule. It is against the foregoing background that the following questions agitate the mind of the researcher in a bid to ensure that valuation estimates become more accurate and standardized in Nigeria. The study focuses in the main on valuations and sale prices of properties as well as valuations between firms by examining the degree to which they are proxies for each other and if not, the reasons why they fail to be proxies. In view of the foregoing, the questions to be addressed include:
- What is the maximum acceptable margin of error (acceptable to all stakeholders) of valuations relative to realized prices?
- Are Nigerian valuations a good proxy for valuations of other firms?
- Are rating valuations a good proxy for property market transaction prices?
- What are the causes of inaccuracy in property rating valuations in Nigeria, if it at all inaccuracy exists?
- What are the condition(s) necessary to ensure correct estimates of market price?
- Are client influences significant contributors to inaccurate valuations in Nigeria?
1.3 Aim and Objectives of the Study
The main aim of this study is to examine the degree of accuracy and consistency in valuers’ estimation of realized property market prices in Lagos metropolis with a view to improving on the quality of valuation practice.
The specific objectives of the study are to:
- Ascertain the perceptions of stakeholders as to the maximum acceptable margin of error in valuation estimates relative to sale prices within the study area
- Determine if open market valuations are good proxies for real property investment markets in the study area
- Examine if open market valuation estimates of one firm are good proxies for contemporaneous valuations of other firms in the study area, and
- Identify and examine clients’ mode of influence on valuation estimates.
The essence of the study is to address the above issues and problems by focusing mainly on the questions of reliability/consistency benchmarks and the nature and causes of reliability and consistency of the professionally prepared rating valuations in the Lagos metropolitan property market.
1.4 Significance of Study
The RICS teamed up with the Investment Property Databank (IPD) to carry out investigations into valuation accuracy in Britain on a bi-yearly basis. Since the Nigerian Institution of Estate Surveyors and Valuers (NIESV) and the Estate Surveyors and Valuers Registration Board of Nigeria (ESVARBON) are yet to follow suit, there is the need for estate surveyors in academics to continuously investigate valuation accuracy and consistency and share with their colleagues in practice results and implications of their findings and induce them to fund future research efforts on this issue.
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.
The outcomes of earlier studies carried out by Ogunba (1997), Ogunba and Ajayi (1998), Aluko (2000) and Ogunba (2004) in the area of valuation accuracy/variation have tended to be contradictory in the sense that while Aluko’s work found that valuation estimates emanating from Nigerian valuers were accurate others concluded otherwise. It is necessary to clarify the position as to what can be considered as the acceptable margin of error and identify plausible reasons for valuation inconsistency amongst valuers operating in the same region and with similar educational background. This is necessary to instill confidence in the ever increasing clients searching for genuine information about the real estate market trends over time and in the near future.
1.5 Scope of Study
No matter how ambitious a researcher could be, no single study can be all encompassing. Hence, study limits have to be defined clearly. Investments in real estate are an ongoing issue on daily basis all over the country. However, time constraint does not allow for the coverage of the entire country. For this reason, the scope of of this research is restricted to Lagos metropolis where the vast majority of Nigerias’ valuation practice is generated. The Directory of the NIESV (2002 edition) shows that out of 439 registered estate surveying and valuation firms in Nigeria, 52% of the firms are based in Lagos metropolis alone. Lagos Metropolis consists of five convenient business districts namely: Marina/Broad Street, Lagos Mainland consisting of Yaba/Ebute Meta, Apapa/Ijora, Ikoyi/Victoria Island and Ikeja from which deductions are made for each of the districts and for the whole of the Lagos metropolis. The five districts represent the major business sectors of Lagos metropolis, where the bulk of valuation activities normally takes place and where most practicing surveyors are concentrated. Lagos Island harbours majority of banks, multi-national companies, insurance companies, and also where wholesale and retail commercial activities are concentrated. Lagos Mainland on the other hand represents the intermediary between the former Federal/State capital territory and the new Lagos State capital. Ikeja is the present Lagos State capital with its attendant employment opportunities as well as concentration of commercial activities. Apapa/Ijora axis represents the commercial neighbourhood that has developed overtime as result of the presence of Apapa seaport acting as the drawing force of both people and commercial activities.
In the choice of property to be studied, Ajayi (1990) noted that wide and detailed studies provide stronger basis for rigorous comparative analysis and more generalizeable conclusions. However, the study concentrated on residential property valuation only. This is necessary because sampling all sectors of property valuation may be impossible for a single researcher given the nature of the study and the time limit to complete the study.
In the choice of valuers, three basic classifications of estate surveyors and valuers has been identified namely private-sector estate surveyors and valuers (i.e. those estate surveyors and valuer working in private practice), public-sector estate surveyors and valuers (i.e. estate surveyors and valuers working in government establishments such as Ministries, Corporations etc) and the academicians. The study focused on valuers in private practice because they are in the majority and are actually the people mostly engaged for valuation assignments by various stakeholders.
There are various methods of valuation such as Investment, Cost/Contractor, Residual, Profit and Comparative methods. For this study, emphasis is given to the Investment Method of valuation because most investors look up to the returns they can make on whatever they put into any venture within reasonable time limits. An intensive study of the five methods of valuation, on the other hand would be too wide and cumbersome.
The purposes for demanding for a valuation exercise are varied. There are valuations for rating and taxation, compulsory acquisition, insurance, balance sheet, merger, mortgage, auction, etc. This study is limited to valuation for property sale purposes only. This is to avoid wide study of all purposes of valuation which could lead to conclusions which may be general and without specific implications or applications in the real estate business.
Notwithstanding the above limitations, the validity of the study would not be affected.
1.6 The Study Area
Lagos State covers an area of about 3,577 square kilometers, representing 0.4% of Nigeria’s territorial landmass according to Esubiyi (1994). The State shares boundary in the North with Ogun State, West with the Republic of Benin, and stretches for over 180 kilometers North of the Guinea Coast of the Atlantic Ocean. Politically, Lagos State according to Ogunba (1997) had expanded as a result of rural-urban drift and had become a metropolis enclosing settlements such as Mushin, Oshodi, Ikeja, Agege, Shomolu, Bariga, Epe, Ikorodu and Badagry. The 2006 National census put the population of the State at 9,013,534.
Lagos Metropolis has been chosen as the study area because it is the most important commercial city in Nigeria thus providing a sufficiently vibrant economic base and valuation activity which the researcher hopes would provide a vigorous and robust study base Lagos apart from being Nigeria’s former capital, is the largest metropolitan city in Africa. The metropolis is located within the coastal frontage of Lagos State and is bounded in the West, by the Republic of Benin, in the East by Ondo State and Atlantic Ocean in the South and in the North by Ogun State. The metropolis covers an approximate land area of 2,350 square kilometers spreading over four main islands of Lagos, Iddo, Ikoyi and Victoria islands.
On the economic scene, Lagos metropolis has grown from a small farming and fishing settlement to become an important centre of commerce, finance and maritime in Nigeria, housing the headquarters of several banks, industries and commercial enterprises. According to the NIESV Directory (2002), most Estate Surveyors and Valuers aggregate around major business districts of the metropolis such as Lagos Island, Ikeja, Apapa/Ijora, and Lagos Mainland where there is the expectation of a very active property market.
1.7 Definition of Key Terms
In a study of this nature, it is considered necessary and desirable to define key terms with a view to clarifying both operational and constructive definitions to avoid ambiguity. Constructive definition involves substituting the concept or construct of the term we are defining with other concepts or constructs, the operational definition requires that the concept or construct be assigned a type of meaning which the researcher wants to carry throughout the study.
1.7.1 Market Value:
Market Value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and willing seller in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently, and without compulsion IVSC (2002). The accuracy of any valuation is, therefore, defined as how close the valuation is to the exchange price in the market place.
1.7.2 Market Price:
Market price refers to realized prices; the recorded consideration paid for a property which has ostensibly been left in the market for a reasonable period of time. The recorded consideration is taken as the best price that a property asset could realistically command in the free market. Transactions do not occur at the point where most players in the market would assess its worth; the transaction occurs at a point which the seller considers to be the highest bid. Market price should therefore capture the highest price at which the property can be sold. Ordinarily, in a perfectly competitive market where there is full information, market value should equate with market price.
1.7.3 Valuation Reliability/Accuracy:
Reliability according to Allan (2000) is the degree to which a measurement instrument gives the same results each time it is used, assuming that the underlying object/situation being measured does not change. One can test reliability by determining whether several observers of an object/situation will give similar accounts of it. Reliability is used interchangeably with the term accuracy in this study. Mathematically, reliability/accuracy is usually measured either in terms of percentage standard deviations ranging from ±5% to ±15%, or through statistical tests such as regression equation, where it is expected that the intercept of the equation would be statistically indistinguishable from zero and the constant indistinguishable from one. The study adopts Crosby et al (2003) definition of reliability/accuracy as the closeness (proximity) of the valuation to the realized exchange price.
According to French (2007) uncertainty was defined as anything that is not known about the outcome of a venture at the time the decision was made. Similarly, Mallision and French (2000) observed that “normal uncertainty is a universal and unsurprising fact of property valuation. The open acknowledgement of that fact, and transparent management of its implications, will enhance the utility of valuations”.
1.7.4 Valuation Consistency and Variation:
Consistency is a term used interchangeably with the term variation in this thesis. It describes the quality of being mutually constant or not being contradictory. Relating this to the present study, consistency in this study will be taken to refer to the closeness or otherwise of the valuation predictions of two or more valuers who carry out valuations of the same property or properties at the same period of time. The terms reliability and consistency are mathematically measured either in terms of percentage standard deviations or through statistical tests such as regression equation, where it is expected that the intercept of the equation would be statistically indistinguishable from zero and the constant indistinguishable from one.
French (2007) observed that the problem with variance research is that information pertaining to it either has to be set up artificially with a number of valuers asked to provide valuation on set of properties or the analysis relate to valuation s carried out at different points of time in the market. The outcomes of such studies varies substantially and in essence simply reports that different valuers have different ideas and thus produce different valuation figures.
This is the process of estimating the market value, insurance value, investment value or some other properly defined value of an identified interest or interests in a specific parcel(s) of real estate as at a given date. It is the estimate of the most likely selling price, the assessment of which is the most common objective of the valuer. The most likely selling price is commonly termed “open market” or “market price”. Baum and Crosby (1988) distinguish between two types of valuation: price prediction to the market or to an individual. Valuation in this thesis is taken to be the prediction of most likely sale prices in the market rather than to the individual.
1.8 Limitations of Study
In the course of the study the under-listed constraints were encountered. These constraints included:
- Limited human, material and financial resources at the disposal of the researcher which imposed restrictions on study coverage.
- The technical nature of some of the questions that were put across to respondents which necessitated the researcher resorting into the use of personal interviews for some respondents thus taking a toll on the time of the researcher.
- Getting actual selling prices of properties is usually tricky and problematic because the sale of a property is always conducted with a high degree of secrecy. Moreover the market / sales prices stated in documents transferring ownership usually submitted to the Land Registries are, more often than not, manipulated to avoid/reduce tax payments.
- The study of a few selected towns and cities can not be completely typical of all towns and cities in a country as big as Nigeria. However, since majority of estate surveyors and valuers in Nigeria aggregate and concentrate in the study area, the findings of the study is believed to be applicable to majority of valuers in the country.
The constraints however did not significantly affect the results of the study because necessary precautions were put in place to consult experienced professionals who had practiced across varying economic spheres before and after Nigeria got her independence. For this reason, the findings, observations and recommendations that emanated from the study could be tested across the major cities within the country and found useful.
1.9 Chapter Summary
In this Chapter, a comprehensive introductory overview to the study was undertaken. The research problem was defined against the background of increasing criticism of valuation methodologies in recent times in Nigeria. The study therefore examined the nature and causal factors of inaccuracy in valuers’ estimation of realized residential property market prices in Lagos metropolis, Nigeria. The justification for the study was premised on three issues: First is the need for estate surveyors in academics to continuously investigate into valuation accuracy and consistency and share with their colleagues in practice results and implications of their findings and induce them to fund future research efforts on this issue. The second justification for the study is to serve as an eye opener for estate surveyors and valuers in practice, other professionals and stakeholders in the real estate business about inherent risk in inaccurate and inconsistent valuation. The third justification arose from the need 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. The scope of the study was limited to Lagos Metropolis which is Nigeria’s major commercial/industrial nerve centre. The next Chapter is a review of relevant literature on the subject of study.