The Valuation Process
• a systematic procedure employed to provide the answer to a client’s question about property value.
• begins when the valuer identifies the valuation problem and ends with the report and valuation of a property.
Definition of Valuation
“the art or science of estimating the value for a specific purpose of a particular interest in a property at a particular moment in time, taking into account all the features of the property and also considering all underlying economic factors of the market, including the range of alternative investments”.
Why valuation of a property is required?
A valuation of a property is required for the following purposes :
a. Statutory Purposes – valuation is conducted for the purposes of which there are rules laid down by law.
b. Non-statutory purposes – valuation is conducted for purposes of which are not subject to any rules/act
i. Compulsory purchase/acquisition ~ For estimating the compensation payable to property or portion of a property which subject to compulsory acquisition (Land Acquisition Act 1960)
ii. Rating ~ to estimate annual value for assessment purposes (Local Government Act 1976)
iii. Stamp Duty ~ to estimate the market value of a property for stamp duty purposes (Stamp Act 1949) iv. Real Property Gains Tax ~ to calculate the chargeable gain/allowable loss for real property gains tax purposes (Real Property Gain Tax 1976)
Non-Statutory Valuation
i. Sale ~ to advise on the likely selling price. Price that a property will fetch if sold.
ii. Purchase ~ to advise on the reasonable price in consideration to purchase a property
iii. Rental ~ a to advise on what rent appropriate
iv. Internal management ~ to estimate market value of a property as an asset of a business/accounting purposes
v. Mortgage/Financing ~ to advise the property value for the purposes of money lent out. The valuation is required by the lender who will not wish to take undue risk. vi. Insurance ~ to advise on the market value for insurance purposes. The valuation exclude the value of the site. The value arrive would be entailed the cost of replacing the building or part of the building destroyed
Basic steps of the valuation process
1. Defining the problem.
2. Preliminary analysis and data selection and collection.
3. Highest and Best Use analysis.
4. Estimate the property value.
5. Application of the three approaches to value.
6. Reconciliation of value indications and final value estimate.
7. Report of defined value.
1. Defining the problem – identify the property to be valued (address or legal description) – identify the property interest to be valued (freehold/leasehold) – ascertain the purposes of the valuation (statutory valuation/non-statutory valuation) – ascertain the bases of the valuation (market value or other than market value) – determine the date of the valuation, scope and other limiting factors to the valuation)
2. Preliminary analysis and data selection and collection. – General; local neighborhood, government, environmental, etc. – Specific; the site itself, improvements, depreciation, history of ownership and use, income and expenses, – Supply and demand; other properties around, demand studies, how long have they been on the market
3. Highest and Best Use analysis. -
Two types of highest and best use
i. land or site as though vacant
ii. property as improved
- The highest and best use of a piece of land is determined by answering four questions in the following order:
i. Is your proposed project legal? Legally permissible
ii. Can it be built practically on your site? Physically possible
iii.Will your project generate the desired return? Financially feasible
iv.Does the proposed use represent the use that will deliver the maximum return? Maximally productive
4. Estimate the property value. Identify the bases of valuation; market value or non-market value bases Property value is estimated by adopting the most suitable approach of valuation method. The five methods of valuation are
a. Comparison method
b. Cost method
c. Investment method
d. Residual method
e. Profit method
A. Comparison Method
Collection Comparable Data
⇊
Analyses Data
(to get uniform unit value)
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Adjust Unit Value
(plus / minus allowances)
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Adjusted Value
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Apply Adjusted Value
B. Cost Method
Site Value
⇊
Building Value
(construction cost - depreciation/obsolesces)
what is site value?
transaction price - building cost ( total build up ) = land value
land value / land area = land value persf
C. Investment Method
•traditionally concerned with an annual income
•adopted for valuing both freehold interest and leasehold interest
•considering the purchase of an asset to generate an income stream over a period of time.
•to provide an opinion on the capital value of the right to receive annual streams of income
•The basis of the approach involves the conversion of an income flow from a property into an appropriate capital sum
• Principle of this method – the present worth of a property is estimated on the grounds of projected future net income (rent)
Three elements are required in estimating the capital value of an interest in real property
i. the net income receive
ii. the period of an annual stream of income will be received – refer to the term of lease/ tenancy
iii. the required yield – the annual percentage expected from the investment that can be obtained from analysis of sales of comparable investments
D. Residual Method
• the most widely used for property with development potential and a good comparable evidences is difficult to find.
• used to assess the value of land and buildings with latent development potential. This method require the valuer to assess and capitalise the potential income stream from a proposed development which does not exist.
• Development potential may be interpreted by the following ;
a. a bare or undeveloped site where planning permission for development has been, or likely to be, obtained.
b. existing building for refurbishment or where planning permission has been, or is likely to be, obtained for a change of use
c. existing building where planning permission has been, or likely to be, granted for its demolition and replacement (redevelop)
we need to understand these before proceeding calculate the residual value.
- net income
- year purchase
- present value
- gross development value
- gross development cost
- developer profit
- land cost
E. Profit Method
•based on the assumption that the value of some properties will be related to the profits which can be derived from their use.
•generally used where there is some degree of monopoly attached to the property
•may be used to value a business property where
a. accounts are available
b. comparative method cannot be employed easily because lack of satisfactory evidences such as hotels, petrol stations, cinema, restaurant and most real estate used for leisure industry.
Gross Earnings/Revenue Estimated Gross Earnings Less Purchase of Goods Gross Profit
Less Working Expenses (excluding rent & loan interest)
Less Interest On Capital Divisible Balance
Less Operator’s Remuneration/Tenant’s share Gross Rent (Annual Rental Payable to landlord)
