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

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

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

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

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)

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)

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

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)

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)

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)

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)

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

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

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

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

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

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

Multiple regression of Growthpoint property data: R Square Adjusted R Square Std. Error of the Estimate .970a .941 998.61340 Size Type (use) Location Depreciation 18

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

Thank you