Hedonic Valuation of Real Estate Properties in Nigeria

Hedonic Valuation of 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.