The real estate market is ever-changing and evolving. Thus, finding the right value for a particular land is one of the biggest obstacles that every real estate investor has to face. Normally, that will bring up the valuation profession into the market. However, it is a niche compared to other professionals in the property sector such as architects, quantity surveyors, building contractors etc. Hence, many people do not know a lot about property valuation and who is a valuer.
Real estate valuation may involve estimating either capital or rental value of a property and a valuer typically expresses his opinion by a valuation report supplemented with plans, images etc. Some of the other details that a typical valuation report include location, site boundaries, building measurement, planning and other restrictions.
There are five main methods used for a property evaluation; comparison, investment, residual, profits, contractors test and at a time, a valuer could resort with one more of these methods.
Comparison is the most prominent and preferred method of valuation as it directly relates to current market transactions. The use of a comparison method is widely used for common types of properties such as houses, offices, shops, warehouses etc. Ideally, for the comparison method, comparable evidence should be carefully selected with similar interest, similar accommodation with recent transactions under a stable market condition. Finally, one best comparable should be selected and adjustment has to be made for differences for estimating the value of the property.
The investment method particulars are concerned with the income generation ability of a particular property. This method is typically used for commercial properties which give investment return by way of a rental income. This method works out from finding profit out of future rental income and then discounting back to the present day for arriving net present value of the property.
The use of the residual method is limited to the properties with development potential or vacant land where the current use (existing use) of the land can be changed to another more profitable one. The formula for this method is calculating gross development value minus development cost including developer profit leaving residual. This is the sum that a developer can spend on property in its undeveloped state. This method suffers from many doubts as it bases on many inputs and costs that tend to change over time. The Profits method could be used properties with no comparable rental/sale transactions are available due to the monopolistic (factual or legal market) nature of the business, for examples- hotels, cinemas and filling stations. Under this method, the gross profit of the business is estimated and then operating expenses are deducted to leave out the amount to be shared between tenant and landlord. The landlord share is for the use of premises as a way of rent. Lastly, the Contractor’s method (cost method) is used as a last resort when comparison, investment, residual or profit method cannot be used. Often this occurs when a property has specialized nature resulting in no comparable market transactions. The theory behind this method is to assess the cost of providing the equivalent property with adjustment to reflect the age and condition of the property into consideration. However, the cost is not always equal to the value determined by the interaction of market forces rather than production cost. Therefore, this method called the ‘last resort’ of its unreliability.
The writer is a Chartered Valuation Surveyor
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