The future of the profession and valuation standards
It’s hard not to notice that the world around us is changing at an unprecedented pace and impacting the valuation profession with much more yet to come.
AI – friend or foe?
TEGOVA started the debate on Automated Valuation Models (AVMs) and their impact on our profession several years ago. Two TEGOVA sponsored analytical reports[1] of top academics pointed to the limited usefulness of statistics in single property valuation assignments. Not only do I share these views, but also welcome EVS 2020’s EVIP 7 embracing (not denying) AVMs as useful tools for valuers, which are however unable to assess Market Value without the human element of a valuer’s intervention.
Despite the balanced position expressed in EVIP 7, the atmosphere of the modern technological revolution has fueled an exaggerated trust in computers favouring the replacement of ‘slow and expensive’ walking-talking surveyors, perceived as slowing down loan origination procedures. Forgotten are the warnings of reputable commentators and institutions pointing to the abusive use of AVM’s as one of the reasons for the financial crisis 14 years ago following the collapse of Lehman Brothers.[2]
Yes, banks are less willing to rely on valuers as allies, at least as long as relatively cheap insurance premiums outweigh the risk of any potentially serious AVM ‘valuation’ errors. No hard feelings, though. A possible solution for the profession is specialisation in the areas where predictive machines are less useful as in the case of the valuation of specialist properties or even commercial properties. Nevertheless, we should not neglect the need to educate the public. We should bring to public attention the dangers of AVM domination. Can it lead to the end of an open market? Already in some residential markets it has been observed that sellers decide on the asking prices for their properties after checking their value on an Internet-based AVM. Potential buyers do the same and armed with this common knowledge the parties easily agree upon a transaction price. Even ignoring the risk of manipulation by providers of such tools, one may easily conclude the advent of centrally regulated prices. We experienced this in Poland during the communist era and surely, we would not like to see a revival of the past.
At the same time, artificial Intelligence is the key to accelerating the technological revolution. The most comparable event from the past was the XIX-century industrial revolution, which deprived millions of agricultural workers of their jobs. However, they quickly found new jobs in newly developed factories. The problem now is that there will be no substitute working places to switch to. There will be less work for some or most of us, as machines take over. Sounds like science-fiction but it is happening. Some years ago, I was impressed having read Yuval Harari[3] predicting a gradually shortening work week. Whoever I talked to about it to reacted with laughter. About a month ago, during an HR training session I heard about research indicating strong employee expectancy of a 4-day work week. And just last week one of the boutique IT companies in Poland announced “free Fridays” for their employees.
The labour market will be affected and our profession will not be exempt. Actually, AVMs are just a sign of this wider process, which however does not necessarily need to be a bad thing, encompassing such clearly emerging events as the shorter working week. What matters is to harness the potential of human/machine interaction to better encompass both the art and science of valuation. Again, the more the human involvement in the valuation process the brighter the future of the valuation profession. In this light, relying blindly on developing simple (not to say primitive) statistical methods of valuation may be a dead end.
In valuers we trust
Whilst the world had still not overcome the pandemic, it was further shocked by Russia’s aggression against Ukraine. Such extraordinary tragedies present huge challenges for valuers due to lack of market data for comparative-based valuations and the unpredictable outcomes of such disasters. It appears however, that many valuers have sold more services during these tough times. This was also the case after the collapse of Lehman Brothers.
It is common knowledge that highly professional services sell on trust and in uncertain times people place trust in humans rather than machines. This was noted during the Polish national valuation conference in 2021, when all participants agreed they had more valuation assignments despite the pandemic, or rather due to it. Clients have remarked that they perceive qualified valuers as trusted partners to assess the value of their properties, whilst in more stable times they would typically rely on the opinions of brokers or just asking prices. Therefore, quite surprisingly today’s challenges may also constitute opportunities.
Market Value versus Fair Value
Increasing globalization has led to a need for unification of accounting rules. We have seen a similar trend taking place in our profession in which the definition of Market Value is a visible sign of such successful unification. Valuation is both an art and a science and despite the obvious differences between these two worlds, they need to coexist. However, with increasing demand for valuations for financial reporting purposes, the concept of Fair Value is coming to the fore. Moreover, our understanding of Market Value is being well assimilated by the world of finance, resulting in the definitions and interpretation of both the bases of value becoming ever more similar. Nowadays the difference between Market and Fair Value is hardly evident. None other than the highly regarded valuation authority, prof. Nick French predicts that Market Value may soon disappear and be completely replaced by Fair Value[4].
Value of Valuation Standards
I have warmly welcomed the EVS 1 statement that valuation of real property is an art. Whilst this may be obvious to many valuers, it may be harder to accept by scientific-minded accountants and auditors. Therefore, there is a need for wide ranging dialogue between respective professional bodies in the interests of connecting these two worlds and to promote a common language relating to not only valuation bases but also methodologies.
One of the platforms for such communication could be the European Valuation Standards as a single source of best valuation practice.
Also, it is worth remembering that apart from regulating our profession, the standards also have an educational element for real estate market stakeholders.
Still, unification of European valuation practice is the main challenge faced by contributors to future editions of European Valuation Standards. The first step has already been made with the addition of a major section on methodology. However, it is a tough decision on where to draw the line between standards and a textbook, albeit for now methodology still needs more attention with the addition of more content to EVS.
I have already had an opportunity of writing in the European Valuer Journal[5] about the importance of clarity in terms of different types of yields and how much a common lack of understanding may affect valuation results. This has been left untouched so far. But there is much more, including the way valuers construct their cash flows. For example, switching from annual cash flows into monthly ones, without appropriate yield adjustments leads to value overstatement. This is not commonly appreciated by the recipients of our valuation reports and quite probably even among some valuers. Thus, is it not the role of a leading professional body to provide its members and the public with some guidance on nuances which may have such serious consequences? Whilst we should not convert EVS into a textbook, perhaps we should at least signal such issues and provide references to reliable external sources. With time, TEGOVA could even start publishing its own textbooks.
New areas
Again, our future profession must be built on trust. Also, we should not only be providers of valuation reports but rather clients’ advisors with a much more multidisciplinary outlook. I welcome TEGOVA’s recent involvement in setting standards for business valuation and the imminent publication of European Valuation Standards in respect of Plant, Machinery and Equipment. I also appreciate TEGOVA’s decision not to confuse the audience by creating one-size-fits-all valuation standards but to deal with each asset class in a stand-alone set of standards.
But this accelerating world opens up new frontiers requiring TEGOVA’s attention. For example, ESG (Environmental, Social, Governance) will become one of the most important talking points in the real estate market in the years to come. Active EU legislation, rising eco-awareness of the population and reputational calculations have already convinced many stakeholders to establish their ESG strategies, start measuring carbon footprints of their activities, etc. Therefore, will our profession be ready to assist clients in their ESG-related tasks, including valuation? During the TEGOVA General Assembly in Brussels in Autumn 2021, such questions were raised by several speakers but found few answers except in the area of EU regulation of energy performance of buildings.
It is time we embraced this topic with greater urgency to make valuers the natural destination for anybody seeking advice on real estate ESG. And there is no better place to start than in the enhancement of EVS albeit through the publication of material well ahead of the next edition of EVS. In particular a chapter on valuation and sustainability should include guidance on the “S” and “G” elements of ESG.
Artykuł ukazał się w periodyku European Valuer – June 2022 – Issue No 26
[1] Prof. George Matysiak „Assessing the Accuracy of Individual Property Values Estimated by Automated Valuation Models” and prof. Ewa Kucharska-Stasiak “Statistics in the Context of Economic Theory and the Limits of Automated Valuation Models in the Valuation of Individual Properties”,
[2] Irish Central Bank Report, “Valuation Process in the Banking Crisis – Lessons Learned – Guiding the Future”, December 2012
[3] Yuval Noah Harari, „21 Lessons for 21st Century”
[4] Thesis expressed e.g., during a lecture delivered by prof. Nick French to Masovian Valuers’ Association on 20th May 2021
[5] Marcin Malmon, „Inconsistent Yields and Cash Flows Lead to Lack of Market Transparency”, REV Journal, Issue No 11, April 2015