- Slides: 27
Introduction To Property Valuation • What is Property Valuation? - Also called real estate appraisal - It is a professional practice - Using various method to estimate monetary value of real estate or property asset - Carried out by a qualified person using VS such as Red Book - It is an art as well as science
Introduction To Property Valuation • What is Value ? - Concerned with market value - Defined as following in accordance with RICS valuation standards ( Red Book , RICS 2011) “ The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parities had each acted knowledgeably, prudently and without compulsion”
Introduction To Property Valuation Continued: This definition assumes that : - A willing seller - A reasonable period - The best price - The market value • An arm’s length transaction – A transaction in which both the buyer and seller act willingly and under no pressure , with knowledge of the present condition and future potential of the property , and in which the property has been offered on the open market for a reasonable length of time with no unusual financing or other circumstances.
Introduction To Property Valuation • Appraisal and Valuation - Are often used interchangeably - A valuation is undertaken to estimate the most likely selling price of a property asset offered on the open market. It relies purely on the interpretation of recent comparable market evidence. - A appraisal is undertaken to determine the individual worth or investment value of a property interest to a single party and which may be quite different from market value.
Introduction To Property Valuation • Different types of property value: - Sale Value : The price (value) a vendor wants on the sale of his interest in a property. - Purchase Value: The price (value) a purchaser is initially willing to pay for a property interest. - Market Value : is derived from sale and purchase value which is the resultant price agreed after negotiation between the parties involved.
Introduction To Property Valuation - Mortgage Value : The value place on the property for loan purposes - Market Rent : The price agreed between a landlord and a tenant for the tenants physical occupation of a property for a finite period. - Asset Value : The value placed on a property for the purposes of company account - Insurance Value: The value assessed to determine the appropriate sum insured in a property structure insurance policy
Introduction To Property Valuation - Development Value : The value of a property capable of a more profitable use than its currently use. - Compulsory Purchase Value: The value of a property subject to a compulsory purchase order and assessed under statutory provision - Probate Value : The value of property as assessed for the purposes of inheritance tax payable on the death of the owner
Introduction To Property Valuation - Rating Value : The annual value of a non-residential property which forms the basis of calculating a local property tax “the rates” payable by the occupier and assessed under statutory provision.
Introduction To Property Valuation • What do we Value? - Determine market value - Freehold Interest and Lease hold Interest # Freehold interest (Owner/ Landlord) – Absolute ownership subject to common law and legislation. Has the right to let the property subject to terms and condition of a lease. # Leasehold Interest (Tenant) – A leasehold is the right to benefit from the land under the terms of a lease for a limited period of time. A tenant , subject to the agreement of the landlord can assign or sublet
Introduction To Property Valuation • Why Do we need Valuer to value Property ? - Due to the nature of property market: 1. Indivisible of property 2. Uniqueness of property 3. Property market is heterogeneous 4. Limited relevant data. 5. Low elasticity of supply 6. Infrequently transactions occur 7. Property need to manage 8. Perpetual 9. Availability of restricted transaction 10. Decentralised 11. Government Intervention .
Introduction To Property Valuation • Simple Property Classification: - Quality : prime , secondary & tertiary Type : retail, office, industrial, leisure, residential & rural Location/submarket : city centre &out of town
Introduction To Property Valuation • Standard Commercial Property Classification: - Offices : standard office, business park - Shops : Kiosk, standard unit, post office, bank , showroom, supermarket, retail warehouse, retail park, shopping centre , department store& market stall - Industrial : factory, workshop, light industrial, warehouse, builder yard, store, storage land storage depot.
Introduction To Property Valuation • How do we value ? Using the following five methods: Direct Methods: * Comparative Method * Investment Method (Income) Indirect Methods: * Revenue (profit) method * Residual method * Contractors Method
Comparative Approach • • • Use for Residential , Agricultural and Commercial. Is the most common method and most accurate Very frequently used for residential property. Used as a basis of some of the other approaches. It is cornerstone of valuation
Comparative Approach (cont. ) • The method entails making a valuation by directly comparing the property under consideration with similar properties which have been recently sold, and finding it value from these past transactions. • The comparable property in the stable market must be : a similar property, a similar area and a recent transaction. • The less the comparable property complies with these requirements, the less valid the comparison
The Investment Method • Used for Shops, Offices and Industrial property. • It is used to value property capable of generating a rental income. • This method entails the capitalization of a net income produced by property to derive its capital value. • This method requires comparable information of rents, rates of return and costs (outgoings)
The Investment Method (cont. ) • Rent less outgoings equals net income. Net income times YP (present value of $1 p. a. @ k % for n years or in perpetual equals capital value.
The Profits or Account Method • Use for Pubs, Clubs, Hotels, Petrol Stations, Leisure Properties. • The , method is used where the value of some properties will relate to profits which can be made from their use. • It initially estimates the rental value , which is then capitalised to derive the capital value
The Profits or Account Method (cont. ) • This method requires knowledge of comparable evidence on wages, turnover and profits and comparable evidence on interest rates. • Gross earning less purchases equals gross profit less working expenses( except rent) equals net rent. • Net rent includes tenant’s share (wages and return for risk and enterprise), interest on capital tied up in business and rent. • The skill required of the valuer is to split the net profit into these components; determine a capital value based on the rental value, and possibly use the information to aid an assessment of the tenant’s business.
The Residual Method • Used for development site (green field land) and redevelopment sites (brown field obsolete building) • Used for land has development or redevelopment potential, i. e. latent value • The method requires evidence of : comparable values of completed development, comparable building cost and comparable evidence of profit/interest
The Residual Method • Value of completed development (GDV) less total expenditure on improvement or development ( including developer’s profit) equals to value of site or property in its present condition (residual value)
The contractor’s Method • It is used to value property with no market/income e. g. churches schools libraries. • This method determines the capital value of a property by relating to its value as a whole to the cost of its constituent parts i. e. land building costs. It assumes that the cost of the building and its value are the same.
The contractor’s Method (cont. ) • This method requires evidence of : comparable site value; comparable building cost and comparable evidence on depreciation / obsolescence. • Value of site plus cost of building equals total value of new property less depreciation allowance and obsolescence equals value of existing property
Factors affect the value of a property • Main factors are: - Economic Climate: # International # National # Interest # Inflation # Unemployment # Local employment # Vacancy rates of similar property # New stock of property in development pipeline
Factors affect the value of a property (cont. ) - Legislation : # Planning legislation # Landlord and tenant acts # Lease terms (lease length , use clause, rent review clause and break option - Property Factors: # Age and condition of building # Design # Type of building and it use # potential for improvement # Location
An Office Building as an example • Quality of space – such as fitness for purpose, design • Flexibility – space, future contractual liability • Location – access, quality of surroundings
STUDENT ACTIVITY • What are the desirable factors affect the value of a residential, retail or industrial property ?