The Reporting of Risk in Real Estate Appraisal. Property Risk Scoring

Risk and uncertainty are inherent parts of the valuation process as often the valuer is unable to specify and price accurately all current and future influences on the value of the asset. The UK valuation profession has been criticised for inconsistencies and failures to reflect risk and uncertainty and this was reinforced by the Investment Property Forum/Investment Property Databank (2000) which highlighted the need for more rigorous risk assessment measures within the property profession. More specifically, they concluded that a new approach is needed which combines conventional analysis of returns uncertainty with a more comprehensive survey of business risks. This debate was brought into shaper focus by the publication of the Carsberg Report (2002), which emphasised the need for more acceptable methods of expressing uncertainty, particularly when pricing in thin markets. This paper presents an alternative methodology for the scoring and reporting of risk ñ Property Risk Scoring ñ which utilises the Analytic Hierarchy Process (AHP), a multi-criteria decision making tool developed by Saaty (1980). The researchers asked senior valuers in the UK profession to identify, and score, the risks attached to the valuation of prime offices. The focus initially was on investment quality risks and four key risks emerged; yield movement, lease length, rental movement and change in occupier demand. Analysis of the results enabled the development of a generic market model to be used to risk score individual property investments. The results are reported on a 1-5 scale, similar to the widely accepted D&B credit rating technique, thus aiding market acceptance. Property Risk Scoring (PRS) as proposed in this paper, involves the analysis and scoring of the total risk of a property asset, which is then reported to the client under the following 4 key headings: market transparency risk, investment quality risk, covenant strength risk and deprecation and obsolescence risk.