CHAPTER ONE
INTRODUCTION
1.0 Background to the Study
Valuation is the process of estimating price in the market place. Such estimation will be affected by uncertainties. Uncertainty in the comparable information 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 valuation (French, 2007).The terms ‘‘development valuation’’ or ‘‘development appraisal’’ refers to professional studies to determine the feasibility and viability of the proposed improvement on land. (Ajayi, 1996) described such appraisals as pre development feasibility/viability assessments which provide a client with a measure of the likely project costs revenues and profitability involved in undertaking a development scheme.
It is generally agreed that uncertainty is due to the lack of knowledge and poor or imperfect information about all the inputs that can be used in the valuation analysis (Byrne, 1995). The terms risk and uncertainty are often used interchangeably. Risk is seen as a euphemism for uncertainty. However, this colloquial use of the words is unhelpful in identifying the principal issues involved. It is important to define these words more precisely. Definitions and discussion about risk and uncertainty are the cornerstone of a number of papers and books (Bryne, 1995; Hargitay and Yu, 1993; Pellat, 1972; Pyhrr, 1973;Robinson, 1987;Sykes, 1983;Whipple, 1988;Wooford, 1978).
Baum and Crosby (1988) opined that risk/return is fundamental focus in modern investment analysis. Sophisticated investors, especially in more advanced property markets like those in the US and UK, are increasingly requiring downside risk analysis and adjustment from Valuers/appraisers in valuation and investment analysis. (Ogunba and Ajayi, 2007; Ogunba, 2008).Risk and uncertainty are inherent parts of the valuation process because the valuer is unable to specify and price accurately all current and future influences on the value of the asset (Adair and Hutchison, 2005). Valuation estimate has therefore been described as a “snapshot” in time that is meant to provide market price at a single point in time. It is an estimate and any estimate is uncertain (Joslin, 2005). Uncertainty comes up in property valuation due to imperfect information or lack of knowledge of all the inputs that will be required in the derivation of the estimate of value. Eliminating uncertainty from property valuation will therefore not be possible as no valuer has perfect information about all the circumstances that can impact on the outcome of the exercise at his disposal. Unless a property is actually sold to determine market price, any estimate is uncertain (Lorenz, Truck and Lutzkendorf, 2006). The role of the valuer is therefore to assess current market conditions and from a “sea of uncertainty” to produce a single judgement (Joslin, 2005; Lorenz, Truck and Lutzkendorf, 2006).