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Property Valuation Presentation for EEPFP 05 th February 2013.
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AGENDA1. Property Valuation2. Function of a Valuer3. Reasons for undertaking valuations4. Constitutional rights5. Factors to be considered in valuation of property6. Municipal property rates Act 6 of 20047. Valuation approaches8. Market Approach9. Income Capitalisation approaches10. The discounted cash flow method or DCF-
AGENDA11. The discounted cash flow method or DCF 12. Residual land value : Development 13. Property and Rist
1. What is property valuation?“ Property valuation may be described as the process which a professional individual qualified to quantify and analyse fixed assets undertakes to establish a range of value or values for a specific property, real estate or property portfolio, taking into account the internal as well as the external environment and all elements that may have an impact on these”
Let’s look at some of these words and their impact on the statement:1.Professional individual- This means an individual as described in the Property Valuers Profession act 47 of 2000. This legislation was passed to govern and gauge the Property Valuation Industry. The legislation provides for 3 main distinctions;A) Candidate valuerB) Professional Associated ValuerC) Professional Valuer
2.Functions of a ValuerThe valuer should have a broad based knowledge of the following aspects*The locality and local environs of the subject property, its relation to the macro and micro economic factors and its proximity to amenities and major services.
*The financial aspects of the property with specific reference to the income that the property may obtain if fully let at market related rentals, the expenses on the property as well as the capitalisation rate that is applicable on the property. The valuer must be able to analyse and express an informed opinion on these aspects.
*The internal and external environmental analysis of the property and the impact that these factors may have on the functional, physical and financial obsolescence of the subject property. *The correct identification of the property utilising the exact and precise legal description, the scrutinization of the title deed and lease agreements on the property.
* The local, national as well as international real estate market analysis and indications on these markets with specific reference to the impact on the subject property.* The investment potential and institutional investment portfolio aspects and the positive and negative factors that may have an impact on the portfolio or the institutional property investor.
3. Reasons for undertaking valuationsPurchase and Sale Rental DeterminationCorporate Reporting /Asset IdentificationPublic flotation/Listed FundsFinancing/Mortgage Replacement costForeclosure/Litigation
ExpropriationLand RestitutionRatingTaxation –Estate DutyTransfer DutyCapital GainsServitudes
4. Constitutional Rights“No person shall be deprived of life, liberty, or property, without due process of law, nor shall private property be taken for public use with out just compensation”
5. Factors to be Considered in valuations of PropertyUniqueLocationSizeTown Planning Information e.gSpatial Development FrameworkSite SpecificConcept of Highest and Best useZoning/Use e.gBulk (FAR)Title Restrictions e.gLeasehols
6. Municipal Property rates ACT 6 of 2004.All properties valued at market value on improved value onlySectional Title Units separately valued
7. Valuation ApproachesThe valuation or the establishment of value is different for each category and type of property. For the purposes of this presentation we would briefly like to focus on the following methods of establishing value.
8.Market Approach- The Market approach is a method of direct comparison. This means that the property is compared directly to properties of a similar nature. The similarity of the property in the case of a residential property would then be the location, the extent of the subject property, the finishes, the accommodation, the overall appeal, the proximity to amenities etc. These aspects are then used to scrutinize the subject property and create a range of value based on analysing comparable sales that have the same comparable aspects as that of the subject property. The simplified explanation is comparing an apple with an apple. (This particular approach is most often used for residential type properties)
9. The income capitalisation approach- The income capitalisation approach is a financial and economic approach to Real Estate valuation. This approach assumes that the property will be fully let at market related rental rates affording the property to generate a gross income stream over one year. This gross income stream will then be simplified into a net income stream taking into consideration all the expense aspects required in order for the property to function correctly. These expenses include but are not limited to Rates and taxes, Management Fees, Maintenance, Audit Fees, Security, water and lights etc.
Once a net income stream is established the property is than capitalised by an appropriate capitalisation rate. These rates are deduced by the valuer in terms of analysing similar sale in the direct local environment. If the value of sales has been analysed and appropriate market related rentals are applied to the property with a similar on anticipated expense ratio than the specific capitalisation rate may be obtained for the subject node and then applied to the subject property. This method is primarily used for commercial type properties.
10. The discounted cash flow method or DCF- This is the best method to utilize when a property with a particular investment angle is analysed. This methods takes into consideration the Net Present Value of the asset as viewed from the financial perspective of “ The anticipated expectations a property would have based on an income stream into perpetuity and then discounted back as of today to reflect that future anticipated returns as a realistic value today”
11. The depreciated replacement cost method- This method is most often used when the property or the environ lacks the required information to formulate a range of value as afforded by the first two methods. This method anticipates the current replacement value of the improvements in question and then depreciated these improvements utilising a factor of depreciation as deduced from the economic, functional, financial and physical obsolescence that may have an impact on the value. This is not the best valuation approach and is often used in conjunction with one or more of the other major methods.
13. Property and riskMarkowitz wrote “Although some risk can be diversified away a certain amount of risk will always remain”It is important to take into consideration risk. Risk and its effect on property must always be analysed and scrutinized at the highest possible level. For the purposes of valuation the Professional must analyse such aspects as vacancy factors, inflation, confidence in the market with reference to credit and credit lending policies, international trade and trade deficits, exchange rates and policies, political aspects socio aspects, and a broad spectrum of local and international financial indicators.
