Valuation Uncertainty – A Key Element of the Global and Local Context
Uncertainty is an integral part of the valuation process, especially during periods of economic, social and geopolitical instability. Valuers face major challenges when determining the value of assets, given the rapid changes in the market, macroeconomic fluctuations and the difficulty of obtaining relevant comparable data. In Romania, the ANEVAR standards, harmonized with the International Valuation Standards (IVS), the guidelines of the Royal Institution of Chartered Surveyors (RICS) and TEGOVA recommendations, provide a clear framework for addressing these challenges.
What Does Valuation Uncertainty Mean?
According to the International Valuation Standards Council (IVSC), valuation uncertainty refers to the variability of results determined by factors such as:
Market conditions – economic fluctuations, changes in supply and demand, political and geopolitical risks;
Availability and quality of data – the lack of accurate information regarding comparable transactions, or a reduced transaction volume in certain market segments;
Valuation methods used – the application of different methods and models, which may lead to divergent results;
Economic and financial factors – inflation, interest rates, fiscal and monetary policy.
The Difference Between Uncertainty and Risk
It is essential to distinguish between uncertainty and risk. Risk refers to the possibility that a future event may affect the value of an asset, such as a decline in prices following a recession. By contrast, valuation uncertainty concerns the process of estimating value at a specific point in time, based on the information available at that moment.
ANEVAR Standards and the Approach to Valuation Uncertainty
ANEVAR, as the professional body regulating the activity of valuers in Romania, requires compliance with the Valuation Standards for Assets, aligned with the International Valuation Standards. ANEVAR provides clear guidance on how valuers should manage uncertainty:
1. Transposition of IVS into Romanian Valuation Standards
The standards require any significant uncertainty to be clearly explained in the valuation report.
Valuers are encouraged to use multiple methods to validate the results.
2. Guidelines and Recommendations for Uncertain Situations
ANEVAR recommends a prudent approach in conditions where transaction volumes are low.
The reporting of uncertainty must be explicit, especially in the case of real estate assets, where market volatility can have a significant impact.
3. Obligation to Document Sources of Information
Valuers must present the data sources used and justify the assumptions or adjustments applied during the valuation process.
The absence of recent transactions must be mentioned as a factor of uncertainty.
The Impact of Uncertainty on the Romanian Real Estate Market
Romania, as part of the global market, is not immune to the current challenges. Valuers encounter difficulties in establishing asset values due to:
1. Rising interest rates – reducing access to financing and, implicitly, demand in the real estate market;
2. High inflation – affecting purchasing power and potentially influencing both the residential and commercial markets;
3. Volatility in construction material prices – causing fluctuations in replacement costs and market values;
4. Geopolitical risks in the region – the Russia-Ukraine conflict and European economic instability discouraging foreign investment in the real estate sector.
How Can Valuers Manage Uncertainty?
1. Transparent Reporting of Uncertainty
Valuers must clearly mention in their reports that the estimated values are influenced by market uncertainty.
ANEVAR recommends including a dedicated section on uncertainty, with explanations regarding the factors that generate it.
2. Use of Multiple Scenarios
Simulations based on different economic assumptions.
Sensitivity analysis of values in relation to fluctuations in prices and interest rates.
3. Correlation of Valuation Approaches
The market approach – necessary, but dependent on the availability of reliable information regarding comparable properties;
The income approach – provides a more stable perspective, especially for income-generating properties, in the context of medium- and long-term stability;
The cost approach – relevant in cases of significant fluctuations in construction material prices. The most recent example is the sharp increase in construction material prices generated by the Covid pandemic.
4. Periodic Review of Estimated Values
In the current volatile context, it is recommended that valuations be updated periodically, especially for assets used as bank collateral.
Valuation uncertainty is an undeniable reality, particularly during periods of economic and geopolitical turbulence. Valuers must be aware of the impact of these factors and adopt strategies that allow them to provide estimates that are as accurate as possible, in accordance with ANEVAR standards. Transparency, diversification of valuation methods and explicit reporting of uncertainty are essential elements for ensuring the accuracy and credibility of valuations in Romania.
