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Uncertainty in Property Valuations - Can it and should it be eliminated?


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.

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.

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