Development land valuation accuracy in China – a case study of Beijing

Abstract

PurposeThe paper aims to quantitatively investigate vacant industrial land valuation accuracy in China, given the importance of the industrial market as an underlying pillar to promote urban growth especially in emerging economies.Design/methodology/approachIn China, the government formulates a Land Benchmark Price (LBP) to serve as a price reference point to sell land rights. To gain an in-depth understanding of the valuation practice by LBP, this paper uses correlation analysis to investigate the varying dynamics between the transaction-based prices and LBP appraisal-based estimates. Furthermore, a margin of error examination investigates the distortion in LBP land appraisals, with an amended LBP presented to improve the accuracy of the current LBP method.FindingsDifferent influencing factors are identified to impact the actual market transaction prices and the LBP construction, leading to a large discrepancy in industrial land appraisals. A systematic problem is recognised that the construction of the LBP follows urban bid curve theory, whereas the land transaction prices do not, demonstrating that an urgent LBP update is needed to capture the market dynamics for industrial market.Practical implicationsThe paper sets out discrepancies in valuation accuracy surrounding the application of the LBP valuation approach in China. This has practical implications for valuers in terms of raising their awareness of the deficiencies in the approach and the pitfalls they need to guard against in their appraisals. It also has implications for developers and investors who rely on valuer appraisals to assess the viability of land purchases; hence, they need to express caution in the appraisal advice sought. Finally, the results demonstrate to the standard setters how they need to modify the LBP equations to better capture market dynamics.Originality/valueThe paper examines valuation accuracy in transitional economies, through valuation differentials between appraised price and the transacted price. The value of the work lies in the analysis of the fundamental differentials between market price and appraised value, which is of importance to investors/developers, practicing valuers, as well as government officials responsible for setting the valuation standards.

Valuation accuracy in the residential property markets in Minna and Abuja, Nigeria

“…If the valuation basis is market value, it is the ability of the appraiser to identify the sale price of the property (or rent on letting if market rental value). In accuracy studies, this target is usually taken as a subsequent sale price transacted in the marketplace (Babawale, 2021;Dou et al, 2021). Boyd and Irons (2002) explained that valuation accuracy is the measure of the difference between a value determination group of value determinations in relation to a subsequently realised sale price.…”

“…In reality, an actual transaction in the property market does not have these "perfect" hypothetical factors, therefore there is likely to be some discrepancy between the actual transaction price and the valuer's opinion of value. The expected level of discrepancy is defined by the margin of error principle (Crosby, 2000;Reinert, 2021a;Dou et al, 2021). Bowles et al (2001) analysed the effect of valuation error on the implied precision of investment performance measurement of property assets.…”

“…Previous studies on valuation accuracy have traced the lack of valuation accuracy to a plethora of reasons, some of which include valuation methodology (Newell and Kishore, 1998;Wyatt, 2003;Bello and Oludele, 2015;Dou et al, 2021), problem of relevant data (Aluko, 1998;Lavers and Spurge, 2001;Abidoye and Chan, 2018), client pressure (Kinnard et al, 1997;Levy and Schuck, 1999;Amidu and Aluko, 2007), ineffective regulatory framework and inadequate valuation curriculum amongst others (Ogunba, 2004;Oduyemi et al, 2016) as summarised in Table 1. Regarding valuation methodology, Babawale (2021) argued that comparing properties being valued with other similar ones is a valuation technique acceptable worldwide.…”

“…Besides, valuations are estimates of the price that could be obtained on a given date under a given scenario (Thorne, 2021). Whilst all valuation estimates carry bias to a certain degree, it is accepted that appraisals need to fall within a range, that is, margin of error, to avoid negligent valuation practice (Dou et al, 2021). Crosby et al (2003) enunciated that valuation accuracy is the proximity of valuation conducted to exchange price in the marketplace.…”

“…As a result, researchers across Europe (UK especially), North America and Australia have in the past 3 decades launched an enquiry into the degree to which valuations provide acceptable predictions of realised price. These studies include Parker (1999), McAllister (1995), Crosby et al (1998), Crosby (2000), Babawale (2008), Reinert (2021a, b), Dou et al (2021), amongst others and their findings exposed valuation accuracy issues and the inability of valuation to equate transaction price in some cases.…”