UNIVERSITY OF PRETORIA Assessment of the Suitability of
UNIVERSITY OF PRETORIA Assessment of the Suitability of Automated Presentation to the Board of Directors Valuation Models in Commercial Real Estate International Studies Valuation 17 October 2021 ERES Conference - Edinburgh, Scotland DGB Boshoff & L de Kock 15 June 2012 1
Introduction • • • Objectives Literature Review Structured Interview Results Empirical Testing Conclusion and Recommendations 2
Objectives • Determine the attitude of Valuers towards AVM use • Empirically test the use of AVMs for commercial property valuation 3
Literature Review • • • Valuations AVMs’ Background Significance of AVMs Use of AVMs in Commercial Property Advantages and Disadvantages of AVMs Future of AVMs and the Valuers Profession 4
Valuations • Limit the risks of financial exposure, role of valuers (Gilbertson & Preston, 2005) • Critical for functioning of property markets, financial markets and economy (Lorenz & Lützkendorf, 2008) • Importance of sound valuation practice and standards – link to financial crises’ (Tretton, 2007; French, 2011) 5
AVMs’ Background • Originate from 1960’s (Rossini & Kershaw, 2008) • Key stimulants: low interest rates, lending activity, internet (Cassens Zillioux, 2005) • Used for mortgage valuations for over 20 years in USA and since 2001 in the UK (Robson & Downie, 2007) • Difference between AVMs and CAMA (Robson & Downie, 2007; IAAO, 2011; Collateral Risk Management Consortium, 2003) • Increasingly competing with residential mortgage valuation (Robson & Downie, 2007) • Strong correlation between countries with CAMA for taxation and those using AVMs (Robson & Downie, 2007) 6
Significance of AVMs • Requirement for speed at reduced cost (Gilbertson & Preston, 2005) • Continued competition between lending institutions and valuers causes increased requirement for use of technology 7
Use of AVMs in Commercial Property • Mass appraisal requires complete and accurate data, effective valuation models, and proper management of resources (IAAO, 2011) • Far more complex, limited comparable data available (Gilbertson & Preston, 2005; Tretton, 2007) • Not comparable with residential AVMs, questionable if could be viewed as valuation (Gilbertson & Preston, 2005; Tretton, 2007) 8
Advantages of AVMs • Cheaper, faster and more accurate collateral valuations, (Gilbertson & Preston, 2005; Robson & Downie, 2007 ; Tretton, 2007) • Enables annual revision (Tretton, 2007) • Consistency and Transparency (Tretton, 2007) • Data Management (Robson & Downie, 2007) • Counter valuer bias and combat fraud (Bretton & Wyatt, 2001; Crosby et al, 2004; Robson & Downie, 2007; Tretton, 2007) 9
Disadvantages of AVMs • Data (Robson & Downie, 2007; Tretton, 2007) • Public Opinion (Gilbertson and Preston, 2005; Tretton, 2007) • The need to inspect property (Fitch, 2006; Robson & Downie, 2007; Tretton, 2007) • Financial Regulation and Risk Acceptance (Robson & Downie, 2007) • Transparency (Tretton, 2007) 10
Future of AVMs and the Valuers Profession • Shortage of supply of valuation service providers (Robson & Downie, 2007) • Survival of property valuation profession (Mooya, 2011) • Opportunity in technology evolutions (Gilbertson & Preston, 2005) • Financial or business skills vs technical skills (Gilbertson & Preston, 2005) • Combining AVMs and traditional valuations (Robson & Downie, 2007) • Basel Accord (Gilbertson & Preston, 2005) 11
Structured Interview Results • 95% of interviewees had prior knowledge of AVMs • 80% of interviewees used residential AVMs previously • 95% of the interviewees had no prior knowledge or experience of a commercial property AVM • 50% indicated AVMs only be used to limited extent for residential valuations • 5% indicated there is scope for commercial AVMs 12
Structured Interview Results • Acceptability of AVMs for commercial property subject to: Ø Data Ø Human intervention, use AVMs as beneficial tool Ø Constant interchange between AVMs and traditional valuations Ø Listed property market and auditing 13
Structured Interview Results • General attitude towards AVMs: Ø 9% positive attitude Ø Senior valuers nearing retirement more opposed to AVMs – training & technology use Ø Concern about fraud in commercial AVMs Ø SACPVP and SAIV opposed to AVMs • All respondents indicated AVMs should be operated by valuers, built by statisticians 14
Structured Interview Results • 95% indicated that AVMs are a threat to the valuation profession • 95% indicated there is no future for AVM use for commercial property without physical inspection 15
Value of the property n PVt = β 0 + ∑ βj. Aijt + ϵi j=1 16
Multiple regression of property data: R. 788 a Adjusted R R Square. 620. 617 Std. Error of the Estimate 1. 325 E 8 • Size • Type (use) • Location 17
Multiple regression of Growthpoint property data: Adjusted R Std. Error of R • • Size Type (use) Location Depreciation . 970 a R Square. 941 the Estimate 998. 61340 18
Conclusion and Recommendations Ø Data Ø Human intervention, use AVMs as beneficial tool Ø Constant interchange between AVMs and traditional valuations Ø Listed property market and auditing Ø Training of valuers Ø Further development of AVMs through distinction between financial risk and property specific risk 19
Thank you 20
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