Areas covered
• Role of valuations and valuer
• Definitions of market value, price and worth
• Five methods of commercial ...
Week 1
• Definitions, concepts and bases
Rationale
• What are valuations or appraisals?
• Why is there a demand for valuations?
• Why is there a (growing) demand f...
Definitions
• Price - exchange value
• Value – exchange or use value
• Worth
– Individual
– Market

• Valuation - predicti...
Market Value
“The estimated amount for which a property should
exchange on the date of the valuation between a willing
buy...
Role of valuations
• Financial reporting and legal/statutory
requirements
• Lending
• Transaction related
• Performance me...
Global definition of Investment Value

• The value of the property to a particular
investor, or class of investors, for id...
Role of Investment Value calculations
•
•
•
•

Buy/sell/hold decisions
Identifying over or underpricing
Choosing between c...
Key Points
• Distinction between price and worth
• Valuers’ role has been concerned with price.
• Increasing demand for an...
The Five Methods of Valuation
• Applications - when are they used?
• Methodologies - how are they used?
• Limitations - wh...
The five methods
•
•
•
•
•
•

The investment or income method
The residual method
The comparison method
The contractors or...
Comparison Approach
• Used for the rental valuation of many types of
commercial properties (in UK).
• Used for the valuati...
Methodology
• Market transactions (deals) provide evidence
of prevailing values.
• This evidence is then applied to the su...
Limitations
•
•
•
•
•
•
•

Data
Availability
Confidentiality
Quality
Timing
Retrospective
Overvaluation/underval
uation

•...
Residual approach
• Land - with development potential
• Buildings with redevelopment potential
• Incorporated into methods...
Methodology
• Calculate value of development
• Calculate cost of development - including
profit as a cost
• Difference is ...
Limitations
• There is substantial uncertainty about the
level of costs and revenues
• Techniques commonly used have some
...
Investment method
• Derived from mainstream finance.
• Focus on the income.
• Value of an asset reflects the present value...
Methodology
• A number of variants.
• Basic approach - apply a capitalisation rate to
income stream
• Rents are set in the...
Limitations
•
•
•
•
•

Similar to comparison approach
Relies on market evidence
Retrospective
Uniqueness
Availability
Contractors method
•
•
•
•
•
•

No market
Specialist purpose built
Operational purposes
Unusual - one off
Insurance
US - a...
Methodology
•
•
•
•
•

Cost of rebuilding plus
Cost of land minus
Depreciation equals
Existing use value
See Red Book defi...
Limitations
•
•
•
•

Inputs are difficult to calculate
Apart from costs data
Land value?
Depreciation?
Profits Method
• Business and property are closely linked
• Hotels/PFS/Restaurants/Cinemas/Pubs
• Income payable is a func...
Methodology
•
•
•
•

Rent = Gross Profit - (Net Profit + Tenant Allowance)
Gross Profit = Gross earnings less purchases
Ne...
Limitations
•
•
•
•
•
•

Retrospective - historic accounts.
May be misleading or inaccurate.
Trading performance issue.
Su...
Key Points
• There is an important distinction between
price and worth
• A valuation is an attempt to estimate market
pric...
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Week 1 slides (2)

  1. 1. Areas covered • Role of valuations and valuer • Definitions of market value, price and worth • Five methods of commercial property valuation – Applications – Methodology – Approach
  2. 2. Week 1 • Definitions, concepts and bases
  3. 3. Rationale • What are valuations or appraisals? • Why is there a demand for valuations? • Why is there a (growing) demand for analysis of worth or Investment Value?
  4. 4. Definitions • Price - exchange value • Value – exchange or use value • Worth – Individual – Market • Valuation - prediction of exchange price
  5. 5. Market Value “The estimated amount for which a property should exchange on the date of the valuation between a willing buyer and a willing seller in an arm’s-length transaction after property marketing wherein the parties has each acted knowledgeably, prudently and without compulsion”
  6. 6. Role of valuations • Financial reporting and legal/statutory requirements • Lending • Transaction related • Performance measurement • Insurance
  7. 7. Global definition of Investment Value • The value of the property to a particular investor, or class of investors, for identified investment objectives.
  8. 8. Role of Investment Value calculations • • • • Buy/sell/hold decisions Identifying over or underpricing Choosing between competing assets ‘Customising’ investment analysis to specific circumstances of the investor
  9. 9. Key Points • Distinction between price and worth • Valuers’ role has been concerned with price. • Increasing demand for analysis of prices and calculations of worth • Market worth - based upon the assumption that there is mis-pricing in the commercial property market
  10. 10. The Five Methods of Valuation • Applications - when are they used? • Methodologies - how are they used? • Limitations - what are the problems with using them? • NB - read recommended texts in conjunction with the notes • Will be further developed in Year 2
  11. 11. The five methods • • • • • • The investment or income method The residual method The comparison method The contractors or cost method The profits or accounts method NB - they are not mutually exclusive
  12. 12. Comparison Approach • Used for the rental valuation of many types of commercial properties (in UK). • Used for the valuation of residential property (in UK). • Often used as a ‘check’ on other methods. • Globally - is most widely used for all types of property. • Arguably most valuation methods have strong elements of comparison.
  13. 13. Methodology • Market transactions (deals) provide evidence of prevailing values. • This evidence is then applied to the subject property. • Appropriate adjustments are made where required. • What does heterogeneity imply?
  14. 14. Limitations • • • • • • • Data Availability Confidentiality Quality Timing Retrospective Overvaluation/underval uation • • • • • • Relevance Heterogeneity Adjustment Subjective Inconsistency ‘Rules of thumb’
  15. 15. Residual approach • Land - with development potential • Buildings with redevelopment potential • Incorporated into methods which require a land valuation
  16. 16. Methodology • Calculate value of development • Calculate cost of development - including profit as a cost • Difference is the remainder that is available for the purchase of land.
  17. 17. Limitations • There is substantial uncertainty about the level of costs and revenues • Techniques commonly used have some technical weaknesses • However, these technical weaknesses may not matter. Why?
  18. 18. Investment method • Derived from mainstream finance. • Focus on the income. • Value of an asset reflects the present value of future income flows. • Used for commercial properties which generate a rental income. • Most important method.
  19. 19. Methodology • A number of variants. • Basic approach - apply a capitalisation rate to income stream • Rents are set in the lease or obtained from market evidence • Yields or capitalisation rates are obtained from sales • We’ll see that the cap rate or yield is really a multiplier.
  20. 20. Limitations • • • • • Similar to comparison approach Relies on market evidence Retrospective Uniqueness Availability
  21. 21. Contractors method • • • • • • No market Specialist purpose built Operational purposes Unusual - one off Insurance US - a mainstream method • • • • • • • Examples Oil refinery Church Library Sports Centre Fire station Hospital
  22. 22. Methodology • • • • • Cost of rebuilding plus Cost of land minus Depreciation equals Existing use value See Red Book definition
  23. 23. Limitations • • • • Inputs are difficult to calculate Apart from costs data Land value? Depreciation?
  24. 24. Profits Method • Business and property are closely linked • Hotels/PFS/Restaurants/Cinemas/Pubs • Income payable is a function of the profitability of the occupying business. • Income is capitalised to give a capital value.
  25. 25. Methodology • • • • Rent = Gross Profit - (Net Profit + Tenant Allowance) Gross Profit = Gross earnings less purchases Net profit = Gross profit less operating expenses Tenant Allowance = Tenant’s salary, interest on tenants investment and risk allowance • Capital value = Rent/ capitalisation rate
  26. 26. Limitations • • • • • • Retrospective - historic accounts. May be misleading or inaccurate. Trading performance issue. Subjective. Controversial. Alternative approaches increasingly used
  27. 27. Key Points • There is an important distinction between price and worth • A valuation is an attempt to estimate market price • A calculation of worth can be used to analyse this price • There are five methods of estimating price or market value

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