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News & opinion

18 OCT 2018

Automated Valuation Models: Opportunity or obstacle?

Stephen Williams FRICS

Stephen Williams FRICS

Head of Standards, Asia Pacific

Singapore

RICS

Valuation is a profession with a long history, illustrated by RICS celebrating its 150th anniversary this year. Valuers around the world employ broadly similar techniques to those of our predecessors: inspect, research, analyse, compare, determine and review.

As technology develops and data becomes more transparent, the use of Automated Valuation Models (AVMs) — computer software that analyses and compares aggregated transactional data and applies a value to an asset — has become more prevalent. Does this mean that the role of the valuer becomes redundant?

The current role of AVMs

AVMs are currently being used largely for homogenous, regularly-traded assets with publicly available transactional data, such as mainstream residential. The AVM provider holds basic descriptive data, including address, floor area, and number of rooms.

Transactional data can either be mined from public repositories, such as land registries, or may be held in a proprietary or subscription database. When a valuation is requested, the AVM uses this data to undertake a comparison and analysis of transaction prices of similar assets in similar locations to determine an estimate of value.

However, AVMs are currently unable to provide accurate estimates of complex assets, those that are commercial or non-homogenous, where the value is not necessarily derived from transactional or easily analysed data.

The impact on valuers

Some financial institutions are using AVMs in the homogenious ends of the market to support lending decisions in place of full valuation reports provided by a professionally qualified valuers , but are they good enough?

At this point in time, availability of appropriate data is limited and varies by market. Transactional data is often headline and does not reflect other incentives that may have been given as part of the sale, such as white goods, legal fees, or stamp taxes. Furthermore, condition cannot be reflected by the AVM, as this can only be determined by a physical inspection.

Other information that may have an impact on value, such as environmental or planning factors, may not be digitally available, therefore making it impossible to be reflected in AVM’s reporting.

Lenders are making decisions on large numbers of transactions, and AVMs offer a low-cost and faster alternative to engaging a professional. The impact of inaccuracy is reduced by spreading the risk across a significant number of transactions — something that is not possible on a smaller scale.

AVMs are a useful tool

Despite these flaws, AVMs can be useful to valuers as a tool. They allow the professional to focus on non-standardised elements of the due diligence process, such as considering areas of risk or opportunity, while the AVM collates the transactional data to carry out an initial analysis.

The analysis can be manually adjusted to reflect the opinion of the professional valuer. Valuers of specialist or complex asset classes can also use AVMs to run basic appraisals on a comparison basis as a check, alongside more complex methodologies.

The evolving role of the valuer

'Crossing the Threshold', a publication by RICS and Morphosis, looks at the future of digitalisation in real estate and the built environment. Across all sectors, it is clear technology is evolving at a rapid pace. Advances in artificial intelligence (AI) and machine learning, and the growing call for data transparency, mean that AVMs have the capacity to become more accurate.

This is enhanced if insights from sentiment survey data, such as the RICS Residential Market Survey, can be built into the machine-learning process. It is possible that this level of accuracy could meet the end-user’s acceptable threshold.

As AVMs rely on data, they will need benchmarking to ensure that ongoing market trends are accurately reflected in the analytical algorithms. Without fundamental cross-checks the accuracy will fall, therefore it is essential that data is cleaned and verified by an appropriately qualified professional.

It is also likely that the output of an AVM will need to be verified by an appropriately qualified professional. While it is easy to envisage the role of the valuer changing over time as AVM technology develops, the valuer will remain a vital component of the valuation process.

Gauging the views of the profession

RICS held Leaders Forums in the Asia-Pacific region — Australia, Singapore, and Hong Kong — as part of a global initiative to gauge views from the profession. This followed the RICS Future of Valuations report, which assessed European markets.

Perspectives were mixed as to the risks and benefits of AVMs to the valuation industry, with significant concern about reliability, accuracy and suitability for complex assets. However, it was clear that valuers in most regions see the benefit of using AVMs as a tool, thereby creating a hybrid human/machine derived valuation report.

Further conversations are necessary to ensure transparency; we cannot simply accept that the output is reasonable, with the methodology locked away in a "black box". This is often the perception of such models.

The public must be aware of the limitations of an AVM in the current stage of development. At this time, AVMs serve as a useful tool to gauge pricing or to get a feel for approximate value, but without the intervention, additional due diligence and judgement of a qualified valuer, they should not be relied upon without caveats.

So, will AVMs lead to the demise of the valuer? It is unlikely, but it could lead to the evolution of the valuer. Valuers have already adapted from rods to lasers, mental arithmetic, spreadsheets, and hand-drawn plans to tablet-based solutions and using software to provide summaries. These are all examples where skills have not been diminished, but have simply evolved with, and been enhanced by, technological advancement.

Crossing the Threshold

Crossing the threshold: Sustainable digitalisation in real estate & cities

Download the report

Valuation Conference

The Future of Valuations: Views from from a European expert group

Read more

Stephen Williams FRICS

Stephen Williams FRICS

Head of Standards, Asia Pacific

Singapore

RICS

Stephen Williams is the RICS Head of Standards for Asia Pacific. He is a Fellow of RICS with over 17 years' valuation and consultancy experience across a range of asset classes. His career has included stints in government service, and around eight years with a leading consultancy in the UK providing valuations of development and investment projects.

Stephen previously carried out 'Red Book' valuation reviews across the Asia-Pacific region to ensure compliance with International Valuation Standards and best practice. In addition to this, he provides advice to members and firms on best practice procedures to assist in risk mitigation.