Valuation uncertainty – when and why this is important

Abstract

Purpose

The recent coronavirus pandemic created uncertainty across most markets. This has resulted in many valuations being reported with caveats warning that they are uncertain. However, many valuers and their clients remain unclear as to what these warnings are supposed to convey and why they are required by many valuation standards, including the International Valuation Standards. The purpose of this paper is to explain how recognition of the need for uncertainty disclosures has developed over the past 25 years and how such disclosures can enhance overall trust in valuation.

Design/methodology/approach

The author has been involved in the development of the guidance issued by both the International Valuation Standards Council and Royal Institution of Chartered Surveyors, which included extensive consultation with financial regulators and valuation users alike. He has also examined the wider economic theories of risk and uncertainty and how these need to be clearly distinguished in valuations.

Findings

This paper identifies the situations under which valuation uncertainty can occur, and steps that a valuer can follow to determine whether it is sufficiently material to require an appropriate caveat to be issued alongside the valuation. It also examines the merits of different ways in which material uncertainty can be disclosed.

Practical implications

The paper should provide valuers with a better understanding of the reason why uncertainty disclosures are required and the circumstances in which they are required. It also provides principles to help them formulate disclosures that are appropriate in different circumstances.

Originality/value

This is an abridged version of a Valuers' Briefing “Valuation Uncertainty – Reporting the unknowable” by the author and published as either an eBook or paperback available from Amazon.

Citation

Thorne, C. (2021), "Valuation uncertainty – when and why this is important", Journal of Property Investment & Finance, Vol. 39 No. 5, pp. 500-508. https://doi.org/10.1108/JPIF-07-2020-0077