Hedonic Valuation of Real Estate Properties in Nigeria

Abstract

Despite the wide adoption of the Hedonic Pricing Model (HPM) approach in property valuation in the real estate domain, a large number of studies conducted by real estate scholars, have tended to focus on the 'explanatory' rather than the 'predictive' ability of the technique. Given this industry focus, and thus the lack of information on the predictive nature of HPM, the present study sets out to investigate the predictive accuracy of HPM in property valuation. Data on sales transaction of residential properties were collected from registered property firms practising in the Lagos metropolis property market, in Nigeria. The collected data were divided into two categories-the training set which was fitted to the HPM developed, and the testing dataset which was used for the model validation. Accuracy metrics were used to evaluate the predictive accuracy of the HPM developed. The analysis shows that the HPM approach produced inaccurate predicted property values in terms of a high mean absolute percentage error (MAPE), mean absolute error (MAE) and root means square error (RMSE) which may not be acceptable by rational real estate investors. Also, about 60 % of the predicted property values produced an inaccuracy that is ± 20% of the actual values, while only 26% yielded an error of margin which is within the industry acceptable margin of between ± 0 and 10%. The HPM could not be entirely relied on to produce accurate property valuation estimates. Therefore, further studies are needed to be carried out to identify more reliable and robust property valuation approaches that can produce values that would be acceptable to all property valuation stakeholders.

Comparative Analysis of the Importance of Determining Factors in the Choice and Sale of Apartments

“…There is also a statistically significant difference between the importance that buyers give to negative externalities and the remaining factors because they strongly disapprove of them. This agrees with the studies presented in the literature review [6,[14][15][16]. Thus, it is important that real estate promotors seek to minimise the effects of negative externalities in their investments.…”

“…Negative externalities harm the dwelling's location, which makes people drive away and look for housing away from these areas. Several studies on this topic point out some examples of negative externalities: proximity to contaminated lands, a nearby burning solid waste site, location in areas with above-average air pollution (inferior air quality), proximity to a sewage treatment plant, landfills and degraded parks, and the existence of high-voltage powerlines and traffic noise [8,14,15].…”

Hedonic valuation of apartments in Kenya

“…Nguyen and Cripps (2001) study found a negative relationship between number of bathrooms and property value. Owusu-Ansah (2012) and Adegoke (2014) both cited in Abidoye and Chan (2018), among others, found that when adequate security measures are in place in a residential neighborhood, for instance; proximity to a police station, improved lighting and so on ( which could result in a low crime rate), this would significantly increase the price of a property.…”

“…There are several methods and approaches of valuation of apartments and other forms of real estate and the choice of method depends on the type of property, purpose of valuation, availability of data and the skill and knowledge of the valuer on the use of the method. Abidoye and Chan (2018) and Pagourtzi et al (2003) have categorized valuation methods into two classes, namely, traditional and advanced approaches. The traditional methods include the cost approach, income approach, market approach, residual method and the profits method, while the advanced approaches include the artificial neural network (ANN) models, autoregressive integrated moving average (Arima), fuzzy logic, case-based reasoning (CBR), machine learning (ML), spatial analysis and hedonic pricing models(HPM).…”

“…According to Schwartz (1995), the popularity of HPM technique has translated into it being adopted both in practice and in theory. Previous scholars have argued that the HPM and other advanced valuation approaches are more accurate and reliable in property valuations compared to the traditional methods (see Abidoye and Chan, 2016, 2018; Pagourtzi et al , 2003 and McCluskey et al , 2013).…”