Addressing risk and uncertainty in property valuations: a viewpoint from Germany

Purpose – The purpose of this paper is to propose and discuss practical approaches on how to address risk and uncertainty within valuation reports, particularly when there is only insufficient comparable transaction evidence available.Design/methodology/approach – A four stage approach to property valuation is proposed that can be particularly useful if there is insufficient comparable transaction evidence available: Identifying, measuring and expressing risk by making use of property rating approaches. Transforming risk into risk premia for calculating the yield on a risk free basis by partially making use of models of risk and return usually applied in finance. Simulating risk premia (since there is great deal of uncertainty involved in determining these premia) by making use of a statistical method commonly referred to as Monte Carlo Simulation. Using the derived yield's probability distribution in combination with further probability distributions for other valuation input variables (e.g. market rent)...

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