Valuation

- Valuation has often been defined as

the art and/or science of estimating
values.
 Purpose of Valuation
Valuation matters. It underpins a major proportion of financial
decisions in mature economies, especially where it serves as
collateral for loans or as an important element in the published
company accounts. Failure to ensure assets are properly valued
risks financial exposure for wide range of stakeholders:

• Banks that use property as collateral for loans;

• Shareholders that have invested in quoted companies and the
companies themselves that become vulnerable to take-overs
and asset stripping if the properties they own are not
regularly and correctly valued in the balance sheet;
• House-buyers;
• Future pensioners whose savings are invested by funds;
• Whole economies that depend on stable banking systems.
 Purpose of Valuation
An estimate of value may be required for a number of purposes. Several are common
and provide what is often considered the ‘bread and butter’ of valuation firms. Others
are specialist in nature and require the skill and training of the valuer to be directed
towards the specific nature of the valuation process and interest being considered.

Requests for valuation will include the following:

• Sale
• Purchase
• Mortgage
• Insurance
• Lease/Rental
• Financial Reporting
• Statutory Purposes
– Probate
– Property Tax
– Land Acquisition
– Rent Restriction
– Transfer Tax
– Hotel Incentives
 Valuation

• Valuation means the provision of a

written opinion as to capital price or
value, or rental price or value, on any
given basis in respect of an interest
in property, with or without
associated information, assumptions
or qualifications. However, it does
not include a forecast of value.
 Valuation

• Valuation is simply a model to try to

determine price. Value is the end result.
It is the quantification of an
understanding of the market; the legal
impact; the physical constraints; the
planning regime; the availability of
finance; the demand for product and the
general economy all influence the value
of property.
 Valuation

• Thus, in the property market, what is

often called a ‘valuation’ is the best
estimate of the trading or spot price
of a building/land.
 Appraisal
• Appraisal means the written provision of a
valuation,
• combined with professional opinion, advice and/or
analysis relating to the suitability or profitability,
• or otherwise, of the subject property for defined
purposes,
• or to the effects of specified circumstances
• thereon, as judged by the valuer following relevant
investigations. It may incorporate a calculation of
worth
 Worth

• Worth is a specific investor’s

perception of the capital sum which
he would be prepared to pay (or
accept) for the stream of benefits
[real or inferred] which he expects to
be produced by the investment
 Worth or Investment Value
Investment Value, or Worth. The value of property to a particular
investor, or a class of investors, for identified investment objectives.

This subjective concept relates specific property to a specific

investor, group of investors, or entity with identifiable investment
objectives and/or criteria.

The investment value, or worth, of a property asset may be higher

or lower than the Market Value of the property asset.

The term investment value, or worth, should not be confused with

the Market Value of an investment property. However, Market
Value may reflect a number of individual assessments of the
investment value, or worth, of the particular property asset.
Investment value, or worth is associated with Special Value.
 Price
• Price is the actual observable exchange price
in the open market.

• In the context of real estate, value should

always be related to price (Value in Exchange)
not worth (Value in Use).

• Price/value are market driven whereas worth

is subjective and based on the particular
requirements/circumstances of the individual.
 Value

• Value is the estimate of the price

that would be achieved if the
property were to be sold in the
market.
 Cost

• Cost is a production-related concept,

distinct from exchange, which is
defined as the amount of money
required to create or produce a
commodity, good or service. Once
the good is completed or the service
rendered, its cost becomes an
historic fact.
 Cost

• The estimated amount for which an

asset 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 parties had each acted
knowledgeably, prudently and
without compulsion.
 Market Value

• It should be noted at this point that the

concept of Market Value presumes a price
negotiated in an open and competitive
market, a circumstance that occasionally
gives rise to the use of the adjective open
before the words Market Value. The words
open and competitive have no absolute
meaning. The market for one property could
be an international market or a local market.
 Market Value

• The market could consist of numerous

buyers and sellers, or could be
characterised by a limited number of
participants. The market in which the
property is exposed for sale is not a
definitionally restrictive or constricted
market. Stated conversely, the omission of
the word open does not indicate that a
transaction would be private or closed.
 Market Value
• However, difficulties still remain with its
interpretation. For instance, the only way one
can find out what a property will fetch in the
market is by putting it up for sale and accepting
the best serious offer. The valuer does not have
this luxury. He or she has to use all available
evidence to arrive at a realistic opinion of what
the property would fetch in the market. But it
can only be an opinion. And certain assumptions
will have to be made – and certain conventions
observed – in arriving at this opinion.
 Market Value
A potential purchaser, who proposes to tie up capital in land
and building, may view the transaction from three positions,
namely:

• if for owner occupation, he will be concerned with any

anticipated social or commercial benefit;

• he may be concerned with the annual return in the form of

income derived from property viewed as an investment; and

• he may be into speculative purchasing, i.e. buying at one

price with the hope of selling at a higher price in the future,
thus having a capital gain.
MARKET AND NON-MARKET BASES
OF VALUE
The concept of Market Value is tied to the collective perceptions
and behaviour of market participants. It recognises diverse
factors that may influence transactions in a market, and
distinguishes these from other intrinsic or non-market
considerations affecting value.

• Market-based valuations must identify and include the definition

of Market Value used in the valuation. They are developed from
data specific to the appropriate market(s) and through methods
and procedures that try to reflect the deductive processes of
participants in those markets. Market-based valuations are
performed by application of the sales comparison, income
capitalisation, and cost approaches to value. The data and
criteria employed in each of these approaches must be derived
from the market.
MARKET AND NON-MARKET BASES
OF VALUE
• Non-market based valuations use methods that
consider the economic utility or functions of an
asset, other than its ability to be bought and sold
by market participants, or the effect of unusual or
atypical market conditions.

• Non-market based valuations must include the

definition of value applied in the valuation, e.g.,
value in use, going concern value, investment
value or worth, insurable value, assessed or
rateable value, salvage value, liquidation value, or
special value.
 NON-MARKET BASES OF VALUE
• Value in Use. The value a specific property has for a
specific use to a specific user and therefore non-
market related.
• This value type focuses on the value that specific
property contributes to the entity of which it is a
part, without regard to the property's highest and
best use or the monetary amount that might be
realised upon its sale.
• The accounting definition of Value in Use is the
present value of estimated future cash flows
expected to arise from the continuing use of an asset
and from its disposal at the end of its useful life.
 NON-MARKET BASES OF VALUE
• Investment Value, or Worth. The value of property to a
particular investor, or a class of investors, for identified
investment objectives. This subjective concept relates
specific property to a specific investor, group of investors,
or entity with identifiable investment objectives and/or
criteria. The investment value, or worth, of a property
asset may be higher or lower than the Market Value of
the property asset. The term investment value, or worth,
should not be confused with the Market Value of an
investment property. However, Market Value may reflect
a number of individual assessments of the investment
value, or worth, of the particular property asset.
Investment value, or worth is associated with Special
Value.
 NON-MARKET BASES OF VALUE
• Going Concern Value. The value of a business as a
whole. The concept involves valuation of a continuing
entity from which allocations, or apportionments, of
overall going concern value may be made to
constituent parts as they contribute to the whole, but
none of the components in themselves constitutes a
basis for Market Value. Therefore, the concept of
Going Concern Value can apply only to a property that
is a constituent part of a business or entity.

• Insurable Value. The value of property provided by

definitions contained in an insurance contract or
policy.
 NON-MARKET BASES OF VALUE
• Assessed, Rateable, or Taxable Value is a value that is
based on definitions contained within applicable laws
relating to the assessment, rating, and/or taxation of
property.

• Although some jurisdictions may cite Market Value as the

assessment basis, methods used to estimate the value may
produce results that differ from Market Value as defined in
IVS 1 (International Valuation Application 1). Therefore,
assessed, rateable, or taxable value cannot be considered to
comply with Market Value as defined in IVS 1 unless
explicitly indicated to the contrary.
 NON-MARKET BASES OF VALUE
• Salvage Value. The value of a property, excluding
land, as if disposed of for the materials it contains,
rather than for continued use without special repairs
or adaptation. It may be given as gross or net of
disposal costs and, in the latter case, may equate to
net realisable value. In any event, components
included or excluded should be identified.
 NON-MARKET BASES OF VALUE
• Liquidation or Forced Sale Value. The amount that
may reasonably be received from the sale of a
property within a time frame too short to meet the
marketing time frame required by the Market Value
definition. In some States, forced sale value in
particular may also involve an unwilling seller and a
buyer or buyers who buy with knowledge of the
disadvantage of the seller.
 NON-MARKET BASES OF VALUE
• Special Value. A term relating to an extraordinary element of value over and
above Market Value. Special value could arise, for example, by the physical,
functional, or economic association of a property with some other property
such as the adjoining property.

• It is an increment of value that could be applicable to a particular owner or

user or prospective owner or user, of the property rather than to the market
at large;

• that is, special value is applicable only to a purchaser with a special interest.
Marriage value, the value increment resulting from the merger of two or
more interests in a property, represents a specific example of special value.
Special value could be associated with elements of going concern value and
with investment value, or worth. The Valuer must ensure that the criteria
used to value such properties are distinguished from those used to estimate
Market Value, making clear any special assumptions made.
 NON-MARKET BASES OF VALUE
• Mortgage Lending Value. The value of the property as
determined by the Valuer making a prudent assessment of
the future marketability of the property by taking into
account long-term sustainable aspects of the property, the
normal and local market conditions, and the current use and
alternative appropriate uses of the property. Speculative
elements may not be taken into account in the assessment of
mortgage lending value. The mortgage lending value shall be
documented in a transparent and clear manner.
The Valuation Report 

The term valuation suggests that it is a mathematical process, however; a large

part of the valuation process depends on the valuer forming his own opinion.
Notwithstanding, much of this ‘intuitive’ process is based on professional
training and experience gathered over the course of his/her career. Having
said this, a valuation for the determination of market value cannot be devoid
of transactional or other derived market data.

The Valuation/Appraisal Report is the formal presentation of the valuer’s

opinion in written form. At minimum it must contain:
 
• A sufficient description to identify the property without doubt;
• A definition of value;
• A statement as to the interest being valued and any legal encumbrances
present;
• The effective date of the valuation;
• Any special features of the property;
• The name of the Valuer.
Government Intervention:

Various pieces of legislation will have impact on the ownership of land/property as an

investment and could erode property values after purchase. For example, Rent
Restriction legislation or the Land Acquisition Act when enacted would have
significant impact on the value of the property investment.

The professional valuer addresses the problem posed by a client who requires
knowing the value of a particular interest in land. To do this the valuer has to follow
a process. The process will consist of:

• Defining the property and interest to be valued;

• Determining the purpose for which the valuation is required;
• Inspection of the property;
• Investigating the legal rights and restrictions, easements, tenancies, etc.;
• Determining planning requirements and considerations
• Classification of comparable transactions;
• Adjusting of price established from comparable evidence to reflect any locational or
physical differences in the property, as well as any pertinent trends in the economy.