An Evaluation Of Property Rating Practice In Nigeria

1.1  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).