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An understanding of uncertainty has always been an integral part of property valuations. No valuation is certain, and the valuer needs to convey to the user of the valuation in the degree of uncertainty pertaining to the market value.

This practice briefing is a short overview of the importance of understanding uncertainty in valuation in normal markets and the particular difficulties now with the material uncertainty created by the COVID-19 pandemic.

This paper discusses how important it is for the valuer and the client to communicate and understand the uncertainty in the market at any point of time. The COVID-19 has had a significant impact on property values and the importance of clarity within valuation reports.

This paper looks at the importance of placing capital and rental value changes due to material uncertainty in valuation reports.

This provides guidance on how professional bodies are advising their members, around the world, on how to report valuations and market value in the context of material uncertainty.

The purpose of this paper is threefold: the primary purpose is to suggest a real estate paradigm spectrum to act as reference for the contextualisation of observed market phenomenon in system terms; the secondary purpose is for the spectrum to contextualise the efficacy of real estate and valuation theory, methods and techniques; and the tertiary purpose is to propose a confidence score for reporting uncertainty to the end user of a valuation report.

Literature was reviewed on the concepts of risk and uncertainty, rationality and several systems thinking domains.

The framework can provide context to observed market phenomenon and distinguishes between agency and mechanism in contributing to conditions of certainty and uncertainty. The argument followed in this paper is that it is necessary to contextualise the efficacy of real estate and valuation theory, methods and models under conditions of certainty, normal uncertainty and abnormal uncertainty. The characteristics of conditions can be used as basis to develop new theory and practical application or modify existing.

Real estate economic theory can be organised in terms of the spectrum and the framework can potentially identify where further research is required and the requirements it must meet as measured against the characteristics of the framework. Current valuation methods and models can continue to be used when valuing under conditions of certainty, however, modifications to methods and models are required to account for complexity when valuing under conditions of normal uncertainty and abnormal uncertainty. The confidence score included in this paper can also be used to report the conditions of certainty/uncertainty under which the valuation was performed.

This paper aims to set the basis for new theoretical and practical developments of insights into real estate economic and valuation theory, methods and models while also contributing to the reporting of uncertainty through the proposed confidence score.

In the last ten years, there has been much debate about the veracity and certainty of valuations. However, this academic analysis was not mirrored in the profession as the buoyancy of the property market meant that rising prices hid any worry about the certainty of the valuation. But since 2007, the downturn has lead to a paucity of transactions and an accentuated degree of uncertainty. Valuers worldwide have been asking how to account for this uncertainty in their valuations. This paper aims to address this issue.

This paper looks at the way in which uncertainty can be reported to the user of the valuation both in a form of words in accordance with the RICS's Valuation Standards as well as the suggested use of a probability‐based valuation model (using Crystal Ball) that provides a graphical representation of the expected state of the market at the time of the valuation.

The RICS Standards require the valuer to report uncertainty in valuations but they do not offer any advice on the form that such advice should take and, thus, there is no consistent approach. This paper suggests a matrix of outputs to allow users to identify quickly the uncertainty in the market at the date of the valuation.

This study contributes significantly to the practical application of probability‐based models to valuation. In particular, the findings from the study will be useful for clients to understand better the context in which a valuation figure is provided to them.

There will always be a degree of uncertainty in any valuation, but it should be incumbent upon the valuer to report “abnormal uncertainty”. This arises when some particular condition of the market or the property leads to the valuer being unable to value with the confidence of accuracy which might normally be expected. Abnormal uncertainty now features in the RICS Appraisal and Valuation Manual and later in this paper we consider how the valuer might identify and measure the degree of abnormal uncertainty. But this paper is predominantly concerned with “normal uncertainty”, which hereafter we will term only as “uncertainty”. The thesis of this paper is that uncertainty is a real and universal phenomenon in valuation. The sources of uncertainty are rational and can be identified. They can be described in a practical manner, and, above all, the process of identification and description will greatly assist many clients, and will improve the content and the credibility of the valuer’s work. Common professional standards and methods should be developed for measuring and expressing valuation uncertainty (Recommendation 34, Mallinson Report, RICS, 1994).

Valuation is a “snapshot” in time. It is an assessment of the market price at a single point in time. It is an estimate and any estimate is uncertain. This paper aims to investigate how the property profession conveys this uncertainty to their clients. Uncertainty must be dealt with in a professional manner in order to offer a reputable service to the general public. It is argued that uncertainty must be expressed within the valuation to offer each party a thorough understanding of the circumstances that surround that particular valuation. It is suggested that the Royal Institution of Chartered Surveyors (RICS) should develop a standard approach to uncertainty expression, not only for the valuer's peace of mind, but in order to offer the best possible service to the general public.

The paper reports the findings of a survey of valuers from leading practices throughout the UK. Examples of uncertainty are included in order to highlight the key issues within the discussion.

The concept of uncertainty within a valuation is poorly understood and is rarely conveyed to the client in any coherent form.

“What additional information does one need a valuer to provide, apart from the figure of his valuation?” In the majority of cases, the valuer's expression of uncertainty is integral, whereby one must express the amount of uncertainty present when undertaking a valuation. In order to offer a client an accurate valuation, the valuer should make clear the background to the value presented and offer evidence about which factors may affect the figure, with regard to variation.

Valuation is often said to be “an art not a science” but this relates to the techniques employed to calculate value not to the underlying concept itself. Valuation is the process of estimating price in the market place. Yet, such an estimation will be affected by uncertainties. These input uncertainties will translate into an uncertainty with the output figure, the valuation. The degree of the uncertainties will vary according to the level of market activity; the more active a market, the more credence will be given to the input information. In the UK at the moment the Royal Institution of Chartered Surveyors (RICS) is considering ways in which the uncertainty of the valuation can be conveyed to the use of the valuation, but as yet no definitive view has been taken apart from a single Guidance Note (GN5). One of the major problems is that valuation models (in the UK) are based on comparable information and rely on single inputs. They are not probability‐based, yet uncertainty is probability driven. This paper discusses the issues underlying uncertainty in valuations and suggests a probability‐based model (using Crystal Ball) to address the shortcomings of the current model.

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.

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.

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.

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.

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.

Valuation is the process of estimating price. The methods used to determine value attempt to model the thought processes of the market and thus estimate price by reference to observed historic data. This information is utilised in the discounted cash flow (DCF) valuation model to determine the single point valuation figure. However, the valuation will be affected by uncertainties: uncertainty in the comparable data available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the estimate of price. This paper discusses ways in which uncertainty can be incorporated into the DCF model.

This paper looks at the way in which uncertainty can be incorporated into the explicit DCF model. This is done by recognising that the input variables are uncertain and will have a probability distribution pertaining to each of them. Thus by utilising a probability‐based valuation model (using Crystal Ball) it is possible to incorporate uncertainty into the analysis and address the shortcomings of the current model.

The outcome of introducing uncertainty in the inputs is to produce a range of different answers. The central tendency of this distribution is very close to the single point estimate of the static model, yet the user of the technique now benefits from an understanding of the upside and downside risk pertaining to this single point estimate.

This study contributes significantly to the practical application of probability‐based models to valuation. In particular, the findings from the study will be useful for clients to understand better the context in which a valuation figure is provided to them.

Examines the ability of an expert computer system to evaluate uncertainty within a valuation context and thus emulate the professional skill of the valuer. Shows that because property valuation programs based on regression analysis require data input for each variable, they are unable to evaluate uncertainty and hence to apply the rational judgement which enables the human valuer to produce a valuation in the light of uncertain or incomplete information.

The purpose of this paper is to compare the value outcomes of the cost approach to the DCF profits method when valuing specialised property under different scenarios as a test for choice of method or model uncertainty; and to quantify valuation uncertainty under each scenario and to argue for an increasing adoption of the profits method of valuation.

A qualitative case study approach was used to analyse four physical valuations performed in practice under four specific scenarios, namely, a business-as-usual scenario, an underperforming business scenario, an expanding capacity scenario and a combined business-as-usual funding a start-up joint venture scenario.

The cost approach relative to the DCF profits approach consistently under-values specialised property under business-as-usual and business expanding scenarios while it over-values in instances of underperforming business scenario.

Financial institutions that predominantly uses or accepts the cost approach for valuing specialised property should consider adopting the DCF profits approach as the default approach when valuing for mortgage lending purposes. Business owners of specialised properties should contract practitioners knowledgeable and skilled in the application of the DCF profits method.

This paper quantifies choice of method or model uncertainty of four different scenarios of specialised properties where both the cost approach and DCF profits methods of valuation were employed. It suggests the adoption of the DCF profits method as the default method of valuation for specialised property.