Addressing risk and uncertainty in property valuations: A viewpoint from Germany

Purpose - The purpose of this paper is to propose and discuss practical approaches on how to address risk and uncertainty within valuation reports, particularly when there is only insufficient comparable transaction evidence available. Design/methodology/approach - After a brief description of how uncertainty and risk are addressed in current UK valuation literature and practice the paper investigates if and how these approaches can be used by valuers operating within the German property market. Then the paper proposes and explains a four-stage approach to property valuation that can be particularly useful if there is insufficient comparable transaction evidence available. Stage 1: identifying, measuring and expressing risk by making use of property rating approaches. Stage 2: transforming risk into risk premia for calculating the yield on a risk free basis by partially making use of models of risk and return usually applied in finance. Stage 3: simulating risk premia (since there is great deal of uncertainty involved in determining these premia) by making use of a statistical approach commonly referred to as Monte Carlo simulation. Stage 4: using the derived yield's probability distribution in combination with further probability distributions for other valuation input variables (e.g. market rent) in order to calculate a range of possible outcomes of market value as well as a number of statistical measures that can be indicative of the valuer's perceived uncertainty regarding the valuation assignment. Practical implications - The paper postulates that there are few (if any) rational reasons for valuers not to use rating and simulation approaches as an indispensable element of the valuation process. Originality/value - The paper proposes and discusses practical approaches on how to address risk and uncertainty within valuation reports, particularly when there is only insufficient comparable transaction evidence available.