Thought leadership
areautomatedvaluationmodelsahelporahindrance?
Due to the time lag in recording and the use of reference values, valuations do not correspond to the exact market price. Research shows that, when adjusted for this time lag, valuation prices are on average 12% above or below the next transaction price (Cannon and Cole, 2011). Nevertheless, a large proportion of property market participants base their indices on these published values. As a result, financiers also lack the best data available to assess risks.
The availability of data and computer-based techniques in the property sector has grown significantly in recent years. These components can be utilised for Automated Valuation Modelling (AVM), whereby values are determined with at least the same level of precision. The models do not rely on a capitalisation rate, but rather on an aggregation of all market transactions, based on a relationship between the values and independent variables. Stakeholders such as banks and investors require the speed and insight that this provides. Using necessary data such as building and location characteristics, in combination with rental flows, the extent to which AVM is currently feasible has been investigated. Firstly, it appears that property with relatively unambiguous characteristics, such as the logistics, office and residential markets, is already well suited to this approach. For instance, it appears that the difference between the determined value and the market price for large-scale residential complexes using this method is only 9% (Kok et al., 2017). Studies such as these indicate that AVM is the way forward. Exceptions where the valuer’s specialist expertise is required will continue to exist for the time being.
With the help of digitalisation, valuers can carry out valuations more efficiently and quickly when the data is available. At Envalue, we advocate for transparency in the sharing of property data, such as location, property and transaction data, which strengthens the valuer’s position. By using AVM, the valuer can focus on their role as an advisor. Want to know more? Please contact us.
