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Transparency, Accuracy and Reliability Issues in Asset Valuation in Nigeria

Oni, A. O. (2013) Transparency, Accuracy and Reliability Issues in Asset Valuation in Nigeria. In: Mandatory Continuing Professional Development (MCPD) programme organized by Ekiti State Branch of the Nigerian Institution of Estate Surveyors and Valuers (NIESV) , Tuesday, 24th September 2013., Ado-Ekiti. (Unpublished)

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1.0 Introduction The problems with the real estate transaction in Nigeria are many and can be traced to the imperfect nature of the property market. In real estate transaction, valuers are often consulted for opinions of values especially for sale, letting, and mortgage purposes. They often encounter problems in expressing opinion of values and the challenge often become greater with the way and manner that practitioners usually treat data on comparable properties they have sold. There is dearth of information due to lack of a central database from where data, figures and facts on recent transactions and valuation on real estate could be retrieved. This is partly responsible for lack of transparency and caused inaccuracy in arriving at an open market value. Valuation is often said to be an art and 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, and such estimation is often affected by uncertainties which may be uncertainty in the comparable information available; uncertainty in the current and future market conditions; and uncertainty in the specific inputs for the subject property. The uncertainties translate into an uncertainty with the output figure, the valuation; and the degree of the uncertainties varies according to the level of market activity with the notion that the more active a market, the more credence would be given to the input information. According to Ayedun (2009), inaccuracy in valuation is hostile to development of the property market as investors find it hard to rely on value being placed on a property and this might affect decisions that investors and portfolio managers make, and thereby lead to financial losses. Apart from this, inaccuracy in real estate valuation could arise due to the archaic approach to valuation being adopted by the Nigerian valuers; whereas in the United Kingdom after which Nigeria has modelled the applicable methods of valuation, a paradigm shift has been experienced in the methods employed in valuing real estate. Because of high competition among valuers in the Nigerian property market, information about recent transactions are kept from each other, value on property that are meant to be open and transparent are now kept hidden and processes and methods being adopted are not transparent enough. Transparency, on the other hand, could be explained as public access to information held by government, rule-makers, as well as information about the process involved in decision-making. It includes varied opportunities for citizens, non-government organizations, businesses, and others outside the government to contribute to and comment on proposed policies. Transparency promotes democratic legitimacy by strengthening the connections between government agencies and the public they serve. It also helps improve the quality of agency rule-making and also helps to ensure meaningful and informed public participation (Coglianes et al, 2008). According to (2013), transparency is explained as the extent to which investors are privy to any financial information about a company such as price levels, market depth and audited financial reports. It further states that transparency implies that "much is known by many" and serves as one of the silent prerequisites of any free and efficient market. It is also known as "full disclosure" and helps to prevent corruption that inevitably occurs when a select few have access to important information, allowing them to use it for personal gain. It simply means the disclosure of information that ensures proper accountability of institutions to their boards, investors, shareholders, regulators and other stakeholders. In respect to real estate, transparency reduces price volatility and tends to be a by-product of a transparent market because all the market participants can base decisions of value on the same data that are available and reliable. This is partly why developed nations across the world have enacted a lot of regulations to ensure that transparency is practiced in all aspect of their economy; and companies have strong motivation to provide disclosure as transparency is generally rewarded through the stock's performance (investopedia, 2013). Furthermore, transparency helps in achieving accuracy in business functions all over the world. Clemens and Daniel (2012) opined that Central Banks worldwide have become more transparent because democratic societies expect more openness from public institutions. Policymakers also see transparency as a way to improve the predictability of monetary policy, thereby lowering interest rate volatility and contributing to economic stability. Transparency is one of the pre-required factors when aiming at accuracy in any field, transparency as it allows critics, competitors and other players in relevant fields to comment and advise on issues that could help and improve. Valuation refers to a process of determining the worth of the interest in an asset at a particular time for a specific purpose. It is said to be both an art and a science and subjective as well as being objective, while it involves putting a value on a property, valuation in property market is the nearest accurate estimate of the trading price of a land or landed property, valuation is much like solving a puzzle and thus requires clues which are obtained from appropriate data and approach, but such data are not readily available for processing unlike other market like the stock market. Valuation is scientific in terms of purpose but an art in terms of execution. Like an art, valuation changes in forms from time to time thereby making valuers to follow the most suitable path that will consider such paradigm shift so as to achieve accuracy relative to the shift. “Valuation accuracy” therefore is the ability of a valuation to correctly identify a target. Where the basis of valuation is the market value, as it is often the case, valuation accuracy is the measure of the ability of valuation to identify subsequent sale price transacted in the market. In a number of studies (see Hager and Lord, 1985; Guilkey et al., 1986; Brown, 1991; Matysiak and Wang, 1995; McAllister, 1995; Adair et al., 1996; Ogunba and Ajayi, 1998; Crosby and Matysiak, 2002; Babawale and Ajayi, 2011; Babawale and Omirin, 2012), valuations were considered to be accurate or inaccurate based on the simple comparisons of valuation figures with transaction prices. The difference between valuations and transaction prices is termed “valuation accuracy” as distinct from the difference between valuation opinions expressed by several valuers, which is termed “valuation variance”. According to Crosby and Matysiak (2002), Otegbulu and Babawale (2011), accuracy of valuation estimate differs between properties depending on a variety of factors. If the property is fairly typical of nearby properties, accuracy will generally be improved. However, even large and unusual properties can be valued with high degree of accuracy if they have been bought or sold in recent times. Asset are items of ownership that is convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities). Asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit. It is any property or object of value that one possesses, usually considered as applicable to the payment of one's debts. Asset valuation is the method of assessing the worth of a company, real property, security, antique or other item of worth; it is commonly performed prior to the sale of an asset or prior to purchasing insurance for an asset and may consist of both subjective and objective measurements. For example, in valuing a company, there is no number on the company's financial statements that tells how much its brand name is worth; this aspect of asset valuation is subjective. On the other hand, net profit is an objective measurement based on the company's figures on income and expense. Common methods for determining an asset's value include comparing it to similar assets and evaluating its cash flow potential. Acquisition cost, replacement cost, and deprival value are also methods of asset valuation. In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation. Consequently, the questions to which answers would be provided at this Mandatory Continuous Professional Development (MCPD) programme are: (i) What are the common terminologies and models used in the valuation of financial assets? (ii) What are the transparency and accuracy issues in asset valuation at the global setting? (iii) Are there identifiable transparency and accuracy issues among the Estate Surveyors and Valuers in Nigeria? (iv) What are the causes of non-transparency and inaccuracy issues among Estate Surveyors and Valuers in Nigeria? (v) What are the most viable solutions to these issues? In these regards, the aim of this paper is to examine the transparency, accuracy and reliability issues in real estate valuation with a view to determining the factors that influence inaccuracy and non-transparency, and recommend viable solutions and ways of making the valuation practice more reliable and therefore attractive to both local and international investors.

Item Type: Conference or Workshop Item (Lecture)
Subjects: A General Works > AI Indexes (General)
Date Deposited: 13 Jan 2014 11:05
Last Modified: 13 Jan 2014 11:05

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