1. UNIVERSITY OF PRETORIA
Presentation to the Board of Directors
International Studies
19 September 2018
Assessment of the Suitability of Automated Valuation Models in Commercial Real Estate Valuation
ERES Conference - Edinburgh, Scotland
DGB Boshoff & L de Kock
15 June 2012

2. Introduction Objectives Literature Review Structured Interview Results
Empirical Testing
Conclusion and Recommendations

3. Objectives Determine the attitude of Valuers towards AVM use
Empirically test the use of AVMs for commercial property valuation

4. Literature Review Valuations AVMs’ Background Significance of AVMs
Use of AVMs in Commercial Property
Advantages and Disadvantages of AVMs
Future of AVMs and the Valuers Profession

5. Valuations
Limit the risks of financial exposure, role of valuers (Gilbertson & Preston, 2005)
Critical for functioning of property markets, financial markets and economy (Lorenz & Lützkendorf, 2008)
Importance of sound valuation practice and standards – link to financial crises’ (Tretton, 2007; French, 2011)

6. AVMs’ Background Originate from 1960’s (Rossini & Kershaw, 2008)
Key stimulants: low interest rates, lending activity, internet (Cassens Zillioux, 2005)
Used for mortgage valuations for over 20 years in USA and since 2001 in the UK (Robson & Downie, 2007)
Difference between AVMs and CAMA (Robson & Downie, 2007; IAAO, 2011; Collateral Risk Management Consortium, 2003)
Increasingly competing with residential mortgage valuation (Robson & Downie, 2007)
Strong correlation between countries with CAMA for taxation and those using AVMs (Robson & Downie, 2007)

7. Significance of AVMs
Requirement for speed at reduced cost (Gilbertson & Preston, 2005)
Continued competition between lending institutions and valuers causes increased requirement for use of technology

8. Use of AVMs in Commercial Property
Mass appraisal requires complete and accurate data, effective valuation models, and proper management of resources (IAAO, 2011)
Far more complex, limited comparable data available (Gilbertson & Preston, 2005; Tretton, 2007)
Not comparable with residential AVMs, questionable if could be viewed as valuation (Gilbertson & Preston, 2005; Tretton, 2007)

9. Advantages of AVMs
Cheaper, faster and more accurate collateral valuations, (Gilbertson & Preston, 2005; Robson & Downie, 2007 ; Tretton, 2007)
Enables annual revision (Tretton, 2007)
Consistency and Transparency (Tretton, 2007)
Data Management (Robson & Downie, 2007)
Counter valuer bias and combat fraud (Bretton & Wyatt, 2001; Crosby et al, 2004; Robson & Downie, 2007; Tretton, 2007)

10. Disadvantages of AVMs Data (Robson & Downie, 2007; Tretton, 2007)
Public Opinion (Gilbertson and Preston, 2005; Tretton, 2007)
The need to inspect property (Fitch, 2006; Robson & Downie, 2007; Tretton, 2007)
Financial Regulation and Risk Acceptance (Robson & Downie, 2007)
Transparency (Tretton, 2007)

11. Future of AVMs and the Valuers Profession
Shortage of supply of valuation service providers (Robson & Downie, 2007)
Survival of property valuation profession (Mooya, 2011)
Opportunity in technology evolutions (Gilbertson & Preston, 2005)
Financial or business skills vs technical skills (Gilbertson & Preston, 2005)
Combining AVMs and traditional valuations (Robson & Downie, 2007)
Basel Accord (Gilbertson & Preston, 2005)

12. Structured Interview Results
95% of interviewees had prior knowledge of AVMs
80% of interviewees used residential AVMs previously
95% of the interviewees had no prior knowledge or experience of a commercial property AVM
50% indicated AVMs only be used to limited extent for residential valuations
5% indicated there is scope for commercial AVMs

13. Structured Interview Results
Acceptability of AVMs for commercial property subject to:
Data
Human intervention, use AVMs as beneficial tool
Constant interchange between AVMs and traditional valuations
Listed property market and auditing

14. Structured Interview Results
General attitude towards AVMs:
9% positive attitude
Senior valuers nearing retirement more opposed to AVMs – training & technology use
Concern about fraud in commercial AVMs
SACPVP and SAIV opposed to AVMs
All respondents indicated AVMs should be operated by valuers, built by statisticians

15. Structured Interview Results
95% indicated that AVMs are a threat to the valuation profession
95% indicated there is no future for AVM use for commercial property without physical inspection

16. Value of the property n
PVt = β0 + ∑
βjAijt
+ ϵi
j=1

17. Multiple regression of property data:
R Square
Adjusted R Square
Std. Error of the Estimate
.788a
.620
.617
1.325E8
Size
Type (use)
Location

18. Multiple regression of Growthpoint property data:
R Square
Adjusted R Square
Std. Error of the Estimate
.970a
.941
Size
Type (use)
Location
Depreciation 18

19. Conclusion and Recommendations
Data
Human intervention, use AVMs as beneficial tool
Constant interchange between AVMs and traditional valuations
Listed property market and auditing
Training of valuers
Further development of AVMs through distinction between financial risk and property specific risk

20. Thank you