Section II. Theory of Responsible and Smart Land Management

Variation in Property Valuation and Market Data Sources in Ghana

Introduction

Property valuation is fundamental to the healthy development of financial and property markets across the world. The effective and efficient operation of Africa’s real estate markets depends largely on property valuation services. In fact, reliable valuation is seen as an important tool for good governance and transparent business activities. Currently, one of the major obstacles to real estate investment in Africa is market transparency challenges (Jones Lang Lasalle, 2013). However, real estate valuations carried out by surveyors in developing markets such as those of African countries are noted to be fraught with errors—inaccuracies, variations, and bias (see Obeng-Odoom and Ameyaw, 2011; Ayedun, Ogunba, and Oloyede, 2011; Babawale and Ajayi, 2011). This could potentially derail the current investment drive in Africa and ultimately threaten its socio-economic progress. It is, thus, necessary to streamline the process of valuation and improve availability of reliable market data to support ongoing efforts at promoting responsible land management. It must be stressed that heterogeneity in values produced by valuers for the same property injects uncertainties in decision-making and creates barriers in the implementation of smart land management interventions.

Valuations are essential for several reasons and are quite central to decision-making by market participants including financial institutions, investors, and governments. For instance, valuation may be required in lending decisions, insurance transactions, government divestiture and privatization programmes, taxation, and compensation in cases where properties are compulsorily acquired, among others. Regardless of the purpose, valuations do not only play an advisory role, but also serve as decision-making tools. Tretton (2007, p.482), for example, reckons that capital and rental valuations of real estate inform a major proportion of financial decisions in mature economies and the valuation of real estate, whether for sale, letting, or taxation purposes, is essential for all businesses. Consequently, inaccurate valuations are a recipe for wrong decision-making and could result in serious adverse repercussions, such as financial loss to investors and financial institutions, unhealthy operation of the property and financial markets, and undermining investor confidence. The collapse of the financial and property markets and the role inappropriate valuations played in the collapse during the 1990s in the UK as well as in that of the 2008 Asian financial crisis (see Ayuthaya and Swierczek, 2014) are instructive.

Several factors have been highlighted in the literature as possible causes of valuation errors including the choice of valuation methods and assumptions, quantity and quality of market data, and heuristic behavior of valuers or behavioral factors. The factor that is quite peculiar to developing markets is the lack of accurate and reliable market data. Property valuations, by their very nature, require the extensive use of data on market transactions to allow for meaningful comparisons between the subject of a valuation and market transactions in similar properties. Not surprisingly, all the methods of valuations require the element of comparison in their application. Consequently, the lack of accurate and reliable data is a major constraint on valuers’ attempt to produce accurate and reliable valuations. Unlike advanced markets, most developing markets lack formal and organized databases of property transactions. Market transactions are often kept secret and where information is revealed, critical details are frequently omitted, making interpretation and analysis very difficult.

This chapter examines two related issues. Firstly, it provides empirical evidence on the extent of variation in values among valuers in Ghana. Variation, which measures the ability of two or more valuations to produce the same outcome, is one of three dimensions of valuation errors. The others are valuation accuracy and bias. It is pertinent to note that establishing variation requires that one measures the difference(s) between two or more valuations on the same property and under the same set of assumptions (Crosby, 2000). In this regard, the study requested professional valuers to undertake a market valuation of a hypothetical residential property as at a particular date based on the same set of instructions. Secondly, the study examines the sources and reliability of data used by valuers in the absence of formal organized databases in many developing markets such as Ghana. Even though there are no formal databases of property transactions, valuers often use methods that require that they rely on data sources for evidence of past transactions. It is, however, unclear which sources of data valuers use, and the extent to which such sources are reliable remains an empirical question. This study, therefore, seeks to investigate property market information sources for valuation practice in Ghana and to analyze the extent of reliability of the information they provide.

This study finds quite a high level of variation in valuation, consistent with anecdotal evidence. The level of variation found is substantially higher than the evidence reported for developed markets. The study also finds that valuers in Ghana most often rely on professional colleagues for data followed by their own database. It appears valuers have little faith in other data sources such as estate agents and the media. Since one of the likely causes of the high level of variation is the lack of accurate and reliable data, it is important that urgent steps are taken to create a database that would allow for the gathering of transaction data in a systematic way and in line with the requirements for a reliable market data.

The rest of the chapter is organized as follows: the next section reviews the literature on property valuation errors, followed by description of the data and methodology. These are followed by the presentation and discussion of the results after which a conclusion to the chapter is provided.

 
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