Navigating abnormal uncertainty in valuation: The case of property valuation in Sri Lanka

Mendis B. S. N, Upuli Perera

Abstract


Uncertainty is inherent to property valuation, and valuation practitioners are accustomed to managing it. However, the compounded events: Easter attack, Covid-19 pandemic followed by the economic crisis in Sri Lanka introduced an unforeseen, abnormal level of uncertainty in the real estate markets from 2020 to 2023 or so, with which valuers were relatively unfamiliar. The domain of practitioners’ approaches to address abnormal uncertainty remains less explored. Accordingly, this paper aims to investigate how valuers in Sri Lanka dealt with abnormal uncertainty in valuation experienced during 2020 to 2023 or so. Employing a qualitative research approach, data for this study were gathered through in-depth interviews conducted in the first quarter of 2024 with purposively selected 12 professional valuers practicing in Sri Lanka. The study finds that the valuers largely relied on a mix of heuristic, pragmatic, and relationship-based strategies to navigate abnormal uncertainty against the background of data-poor and opaque real estate market. Professional judgement emerged as a central mechanism reconciling the conflicting market signals and the limited market evidence. While some of these practices demonstrate alignment with internationally recognised valuation guidelines and standards, some fall outside of formalised frameworks leading to behavioural uncertainty in valuation. The study highlights the need for the development of context-sensitive professional guidance for valuation under conditions of abnormal uncertainty to ensure consistency and transparency in valuation practice.

 

Keywords: Abnormal uncertainty, behavioural uncertainty, emerging markets, heuristics adjustments, professional judgement, valuation, valuation standards


Keywords


Abnormal uncertainty, behavioural uncertainty, emerging markets, heuristics adjustments, professional judgement, valuation, valuation standards

Full Text:

PDF

References


Adair, A., & Hutchison, N. (2005). The reporting of risk in real estate appraisal property risk scoring. Journal of Property Investment and Finance, 23(3), 254–268.

Ahmed, M. Y., & Sarkodie, S. A. (2021). COVID-19 pandemic and economic policy uncertainty regimes affect commodity market volatility. Resources Policy, 74, 102303.

Ali, H. M., Ling, G. H. T., Sipan, I., Omar, M., & Achu, K. (2020). Effects of behavioural uncertainties in property valuation. International Journal of Built Environment and Sustainability, 7(3), 69–79.

Ali, S. B., & Khalidi, M. A. (2020). Valuation of equity securities, private firms, and startups. IBT Journal of Business Studies (IBT-JBS), 16, 125–140.

API. (2020). Valuation protocol-Significant valuation uncertainty. https://www.api.org.au/wp-content/uploads/2020/05/Valuation-protocol-Significant-Valuation-Uncertainty-Final-Board-Approved-290320.pdf

Banerjee, A. V. (1992). A Simple model of herd behavior. Source: The Quarterly Journal of Economics, 107, 797-819.

Brown, G. (1991). Valuation uncertainty: Common professional standards and methods. https://www.prres.org/uploads/796/1570/French_Valuation_Uncertainty.pdf

Bryman, Alan. (2016). Social Research Methods. Oxford University Press.

Bywater, N. (2011). Reflecting uncertainty in valuations for investment purposes: A brief guide for users of valuations. https://bernatbosch.wordpress.com/wp-content/uploads/2012/01/reflecting-uncertainty-in-valuations-for-investment-purposes-a-brief-guide-for-users-of-valuations.pdf

CBSL. (2020). Financial System Stability Review 2020. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/fssr/fssr_2020e1.pdf

CBSL. (2022). Financial System Stability Review 2022. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/fssr/fssr_2022e.pdf

CBSL. (2023). Inflation-Public Enemy Number One. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/otherpub/information_series_note_20231221_bitcoin_inflation_public_enemy_number_one_e.pdf

CBSL. (2024). Financial Stability Review 2024. https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/financial-system-

Cheloti, I., & Mooya, M. (2021). Valuation problems in developing countries: A new perspective. Land, 10(12), 1352.

Crosby, N. (2000). Valuation accuracy, variation and bias in the context of standards and expectations. Journal of Property Investment & Finance, 18(2), 1463–1578.

Diaz, J., & Hansz, J. A. (1997). How valuers use the value opinions of others. Journal of Property Valuation and Investment, 15(3), 256–260.

Diaz, Julian. (2002). Behavioural Research in Appraisal and Some Perspectives on Implications for Practice. RICS Foundation.

French, N. (2011). Valuing in the downturn: Understanding uncertainty. Journal of Property Investment and Finance, 29(3), 312–322.

French, N. (2020). Property valuation in the UK: Material uncertainty and COVID-19. Journal of Property Investment and Finance, 38(5), 463–470.

French, N., & Gabrielli, L. (2004). The uncertainty of valuation. Journal of Property Investment & Finance, 22(6), 484–500.

French, N., & Ward, C. (1995). Valuation and arbitrage. Journal of Property Research, 12(1), 1–11.

Friedman, M. (1953). Essay in Positive Economics. In Phoenix Books. The University of Chicago Press.

Gau, G. W. (1987). Efficient real estate markets: Paradox or paradigm?. AREUEA Journal, 15(2), 1-12.

Hager, D. P., & Lord, D. J. (1985). The property market, property valuations and property performance measurement. Journal of the Institute of Actuaries, 112(1), 19-60.

IMF. (2022). Sri Lanka: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka; IMF Country Report No. 22/91.

Iroham, C. O., Ogunba, O. A., & Oloyede, S. A. (2014). Effect of principal heuristics on accuracy of property valuation in Nigeria. Journal of Land and Rural Studies, 2(1), 89–111.

IVSC. (2021). International Valuation Standards. International Valuation Standards Council.

Joslin, A. (2005). An investigation into the expression of uncertainty in property valuations. Journal of Property Investment and Finance, 23(3), 269–285.

Kaluthanthri, P. C., & Hippola, N. B. (2023). Valuers’ Perception on Mitigating Material Uncertainty in Property Valuation. South Asian Journal of Social Studies and Economics, 17(2), 27–38.

Kelegama, S. (2000). Development in independent Sri Lanka: What went wrong?. Economic and Political Weekly, 35(17), 1477–1490.

Kontogianni, F., Hope, L., Taylor, P. J., Vrij, A., & Gabbert, F. (2020). “Tell me more about this…”: An examination of the efficacy of follow-up open questions following an initial account. Applied Cognitive Psychology, 34(5), 972–983.

KPMG. (2020a). COVID-19: Valuing real estate amid uncertainty.

KPMG. (2020b). Real Estate: Valuation certainty in uncertain times.

Kucharska - Stasiak, E. (2013). Uncertainty of property valuation as a subject of academic research. Remav, 21(4), 17–25.

Lorenz, D., Trück, S., & Lützkendorf, T. (2006). Addressing risk and uncertainty in property valuations: A viewpoint from Germany. Journal of Property Investment and Finance, 24(5), 400–433.

Mallinson, M., & French, N. (2000). Uncertainty in property valuation – The nature and relevance of uncertainty and how it might be measured and reported. Journal of Property Investment & Finance, 18(1), 13–32.

McGreal, S., & de la Paz, P. T. (2012). An analysis of factors influencing accuracy in the valuation of residential properties in Spain. Journal of Property Research, 29(1), 1–24.

Mohammad, N. E., Ali, H. M., & Jasimin, T. H. (2018). Valuer’s behavioural uncertainties in property valuation decision making. Planning Malaysia, 16(1), 239–250.

Perera, T. G. U. P. (2010). Implementing land registration systems in Sri Lanka: Being pragmatic. Sri Lankan Journal of Real Estate, 4, 74–96.

RICS. (2019). Valuation of development property.

RICS. (2020). RICS material valuation uncertainty-criteria, requirements and considerations for declaring and rescinding material uncertainty.

RICS. (2024). RICS Valuation-Global standards.

TEGoVA. (2020). Message from TEGoVA concerning valuation during the pandemic.

Thorne, C. (2020). Valuation uncertainty – When and why this is important. Journal of Property Investment and Finance, 39(5), 500–508.

Toivonen, S., Sinisalo, H., & Uusitalo, E. (2023). The wakeup call of COVID-19: Perceptions of crisis impacts in the real estate market. International Journal of Strategic Property Management, 27(1), 64–75.

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131.

Uddin, M., Chowdhury, A., Anderson, K., & Chaudhuri, K. (2021). The effect of COVID-19 pandemic on global stock market volatility: Can economic strength help to manage the uncertainty?. Journal of Business Research, 128, 31–44.

Uhruska, M., & Małkowska, A. (2021). The impact of COVID-19 on the work of property valuers: a glance at the polish state of play. Journal of Risk and Financial Management, 14(8), 378.

UNICEF. (2020). Tackling the COVID-19 economic crisis in Sri Lanka: Providing universal, lifecycle social protection transfers to protect lives and bolster economic recovery.

Warren-Myers, G. (2015). Valuing sustainability in Australia: Implications for the valuation profession. Pacific Rim Property Research Journal, 18(2), 163–179.

Wilkens, L. (2014). Client Influence on Valuer behaviour in South Africa-Nature, Prevalence and Consequences [Degree thesis, University of Cape Town (UCT)].

World Bank. (2021). Economic and poverty impact of COVID-19.

Wyman, D., Seldin, M., & Worzala, E. (2011). A new paradigm for real estate valuation? Journal of Property Investment & Finance, 29, 341–358.


Refbacks

  • There are currently no refbacks.