A good valuation uses both art and science

In our new Leeds office we have invested in something called a dictation pod, writes Andrew Wells, residential valuation partner at Allsop. It’s a glass box for single occupancy, not unlike the soundproofed room contestants were sent to on the TV game show Mr & Mrs (you have to be of a certain age to remember that). It’s in there that our valuers can concentrate when they dictate a report. Our valuers need a bit of peace and quiet to write their final report because we have desks next to our agents, who can be pretty noisy. In London and Leeds we have long recognised the professional benefit of hearing how sales are progressing, who is in the market and how busy the phones are. When we can see that a closing date for sealed bids generates 12 offers or conversely that investment asking prices aren’t being met, it becomes our own in-house thermometer of the market. The mood of our auction colleagues, pre- and post-sale is also pretty tell-tale.  There is of course a reverse benefit, too, for our agents and auction team co-locating with valuers. Among other things, time is often saved for them in a search of comparables that inform a guide price, when they can adopt ours. Further, we valuers like to think we can ground our agents with a dose of reality from time to time, or help them with the too-technical questions that arise when a deal has got stuck. The access that we valuers have to the up-to-the-minute auction and private treaty sales data is therefore invaluable, taking valuations away from the textbook. Which brings me to that perennial question: is valuation an art or a science?  Having an ear for the market In my view, it’s both. The arty bit is in making real-time judgments on the market, on demand and supply and what type of purchasers would be in the buying mix. To accomplish that bit correctly, the valuer must of course have an ear for the market and access to the people selling and buying. Good valuers have an instinct for spotting movement in the market and are entrenched in the “now” of things. That’s where our agency and auction colleagues come in.  The science bit is what you will find in the formula for the present value of £1 in say 8.5 years’ time at a yield of 6.25%. Or in a 35-year discounted cash flow that delivers an ungeared IRR of 8.2%. These and other methods are employed by valuers at first to get a valuation into the right “ball-park”. They then employ their market nous to refine the answer to give a best fit to what a hypothetical buyer would pay for the property.  My point is that a property valuation derived solely from a theoretical or scientific approach and devoid of market perspective – in other words without the art – is unlikely to be accurate. There may be a hypothetical buyer, but they are in a real market. A few months ago I had a doorstep discussion with my neighbour who is an expert in 18th century European furniture at one of the international fine art auctioneers. He was telling me how difficult it is to place a value on items going to auction given the fickle nature of the fine art market and the unique appeal of each piece. I think his implication was that I had it easy being a residential property valuer, but he wasn’t so rude as to say that directly.  A bit of science needed To some extent, I could see his point. Some property valuations are indeed quite straightforward and the client’s expectations of accuracy are well founded. Certainly, if something very similar and close by has sold recently then the valuer need have little recourse to science. However, predicting what the market will pay for a retail parade let to multiple covenants with a student hall of residence above it, needs quite a bit of science in the mix.  One of my favourite musicals is Mel Brooks’ The Producers. There is a scene in an office where there are identically spaced rows of maybe 20 desks, each with a calculating machine (I think it’s an insurance office). The staging is meant to highlight the boredom of such a regimented existence. The ensemble breaks out into song and dance and it’s an impressive scene. It reminds me how valuation departments used to look in the old days, and may still do so in some firms. It’s a little strong to call them valuation factories perhaps, but you get my gist. In my view the best valuers work alongside their agency teams and can reflect what’s happening in the market through the potent mix of both art and science.  Our glass box is a great innovation but it doesn’t pay to spend too long in there in case you detach yourself from what’s happening out in the market. It has one small advantage, however: you can sing in the box and no one will hear.