An assessment of the impact of valuation error on property investment performance measurement

Abstract

Analyses the effect of valuation error on the implied precision of investment performance measurement of property assets. A prerequisite for measuring the absolute or relative performance of commercial property investments is that valuations provide a reliable proxy for prices. However, there are conceptual and empirical grounds to suggest that uncertainty is inherent in the valuation process. This is primarily due to the structure of the commercial property market and the techniques and guidelines of the property valuation process. Sampling theory is used to measure portfolio valuation error confidence bands for hypothetical property investment portfolios based on different assumptions concerning assumed levels of valuation error, size of portfolio and number of measurement time periods. It is concluded that, for the majority of investment portfolios, property investment performance measures will include some uncertainty and thus the property fund manager should be sceptical of the implied precision in reported measures of return.