Property valuation - Lecture notes all PDF

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Property valuationIntro to ValuationMonday, 17 July 201710:03 amValuationThe monetary worth of something, especially as estimated by a valuerValuation by registered valuer, NZIV and PINZMarket Value / IVS frameworkThe estimated amount for which an asset should exchange on the valuation date betwe...

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Property valuation

Intro to Valuation Monday, 17 July 2017 10:03 am

Valuation  The monetary worth of something, especially as estimated by a valuer  Valuation by registered valuer, NZIV and PINZ

Market Value / IVS framework  The estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction, after proper marketing and where the parties had each acted knowledgable, prudently and without compulsion Statutory definitions of value  Rating value  Capital value  Land value  Unimproved value  Special rateable value  Annual value  Existing use value  Limited use and special purpose properties  Investment value  Going concern value  Special value  Insurable value  Slavage value  Liquidation value  Fair vale

Range of valuations  Market purposes  Mortgages  Renting and leasing  Rent and lease renewals  Determination under contract  Rateable valuations and objecttinos  Crown land sales  Crown land acquisitions  Statutory rental valuations  Curtilage valuations  Matrimonial disputes  Company assets  Portfolio audits  Insurance  Financial counseling

Factors of value  Utliity  Scarcity  Desire  Effective purchasing power Valuers Role  To simulate an auction o Subjective opinions o Sale is objective opinion  To determine an objective market value Definition of market value  The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgably, prudently and without compulsion

Concepts of value  Principle of willing buyer, willing seller  'Most probable selling price'  Highest and best use  'the use which at the time can generally be described as the most profitable'  Attached to the land Three main valuation approaches  Sales comparison approach  Replacement cost approach  Income approach

Important Reading Saturday, 22 July 2017 12:58 pm

Try read this before 5 august test.

IVS Standards Saturday, 22 July 2017 12:59 pm

Why have standards?  To ensure concepts such as market value and fair value are consistently applied  Provides financial information to users that are comparable and consistent across international borders  To assist with financial reporting  Bank risk management

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Public protection

Who sets Valuation Standards?  International - International Valuation standards council (IVSC)  New Zealand - Propert Institute of NZ (PINZ) & New Zealand Institute of Valuers (NZIV)  New Zealand and Australia produce joint Standards and Guidance which also include specific variations for each country to recognise differences due to legislation What is the IVSC?  Established more than 25 years ago  Formed by a wide range of professional valuation bodies from around the world who recognised the need for uniformity in valuation approach  The IVSC has now gained international recognition by bodies such as the World Bank  In a number of countries IVS have been incorporated into low or regulation  IVSC has a Board of Trustees to provide Governance and Strategic Direction  In 2017 restructured to create a Tangible Assets Board and Business Valuation Board with oversight by a Standards Review Board. There is also a Membership and Standards recognition board International Valuation Standards  Background       

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International Valuation Standards are set by the International Valuation Standards Council (IVSC) NZ Standards are developed by PINZ and API Standards Boards Specific NZ Guidance Notes have been developed for NZ only requirements The Standards are Mandatory for NZ Members IVSC released the most recent version in 2017 which will become effective in NZ from 1 July 2017 As valuation provides an essential underpinning to the global financial system, the IVSC was required to develop better tools that will reduce the chances of another crisis The key objective of the new edition of the IVS is to boost confidence in the valuation process for business owners, investors, lenders and others who rely on the valuation for investment and other financial decisions The standards aim to bring consistency and transparency to the key input assumptions, models and process involved in valuation

IVS 2017 Background  The 2017 standards represent a major change from IVS 2013  Considered to have insufficient content on methodology  IVS 2017 expands on methodology and clearly identifies mandatory requirements  IVS 2017 is arranged into o Framework o General standards o Asset standards  There is also an Introduction section and a Glossary IVS Introduction

The introduction covers the background to the IVSC and the objectives building confidence and public trust by producing standards and securing their universal adoption and implementation for the valuation of assets across the world It also discusses the basis for the development of standards which are designed to do one or more of the following:  Identify or develop globally accepted principles and definitions  Identify and promulgate considerations for the undertaking of valuation assignments  Identify specific matters that require consideration and methods commonly used for valuing different types of assets/liabilities. The IVS consist of mandatory requirements that must be followed in order to comply. Certain aspects of the standards do not direct or mandate any particular course of action but provide fundamental prinicples/concepts that must be considered IVS Glossary               

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Assets - Individual asset/liability/ group of either or both Client - the entity for whom the valuation is performed Jurisdiction - legal and regulatory environment in which the valuation is performed May - An action/procedure that valuers have a responsibility to consider Must - an unconditional responsibility Participant - relevant participants pursuant to the bases of value utilised Purpose - the reason the valuation is performed Should - indicates responsibilities that are presumptively mandatory Significant and/or material - professional judgement based on impact on valuation and/or end user decisions Subject or subject assets - assets valued in the engagement Valuation purpose or purpose of valuation - the reason the valuation is performed Valuation reveiwer - professional valuer engaged to review work of another valuer Valuer - individual, group of individuals or firm possessing necessary skills Weight - amount of reliance placed on a particular approach or input Weighting - analysising and reconciling results from different methods IVS Framework Compliance with Standards - if a statement is made that a valuation has been undertaken in accordance with IVS it is implicit that it has been preparede in compliance with all relevant standards issued by IVSC Assets and Liabilities - the standards apply to the valuation of both assets and liabilities and include groups of both Valuer - indivdual or firm possessing the necessary qualifications, ability, and experinced to undertake a valuation in an objective, unbiased and competent manner Objectivity - requires the valuer to make impartial judgements on inputs and assumptions Competence - valuations must be prepared having the appropriate technical skills, experince and knowledge to undertake the subject valuation Departures - a circumstance where specific legislative, regulatory or authoritative requirements must be followed that differ from some of those requirements of IVS. A valuer may still state compliance

IVS 101 Scope of Work  This covers both valuations and valuation reviews

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All valuation advice must be appropriate for the intended purpose A valuer must ensure that intended recipients understand what is to be provided and any limitations on it use before it is finalised A valuer must communicate the scope of work to its client prior to copletion including the following: o Identity of the valuer and any material cnonection must be diclosed o Identity of the client o Identity of other intended users o Idenify assets being valued o The valuation currency o Purpose of the valuation - this will determine basis of value o Define basis of value - must be appropriate for the purpose o Valuation date

Nature and extent of of the valuers work and any limitations Nature and source of information replied upon Significant assumptions and/or special assumptions The type of report being prepared Restrictions on use, distribution and publication of the report Compliance with IVS Wherever possible the SOW should be established and agreed prior to commencing A written SOW may not be necessary however a written SOW should be prepared Changes to the SOW may occur during the valuation process Changes must be communicated to the client IVS 102 Investigations and Compliance

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General Principle o Compliant with IVS valuation assignments including valuation reviews, must be conducted in accordance with all the principles set out in IVS that are aprops for the purpose and ther terms and conditions set out in the Scope of Works Investigations o Made during the course of the assignment must be aprops for the purpose of valuation of the valuation. Limits may be agreed on the extent of evidence required determined by valuerS INVESTIGATION AND NOW IN THE sow. o Information provided to the valuer by other parties should be considered in terms of credibility - significant inputs may require consideration, investigation and/or corroboration. o In considering credibility and reliability of information provided valuers should consider o Purpose of valuation o Significance of the information on the valuation conclusion o Independence and expertise of the source information Valuation record o A record must be kept of the work performed during the valuation process for a reasonable period of time having regard to any relevant statutory, legal or regulatory requirements o These records should include o Key inputs o Calculation o Investigations

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Analysis Copy of draft reports send to client Copy of final report

IVS 103 Reporting

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It is essential that the report communicates the information necessary for a proper understanding of the valuation. A report must provide the intended users with a clear understanding of the valuation The report must set out a clear and accurate description of the scope, its purpose, intended use and disclosure of any assumptions, special assumptions, significant uncertainty or limiting conditions that directly affect the valuation Content will be determined by purpose, complexity and users' requirements. The format of the report should be agreed as part of establishing the scope of work. Compliance does not require a particular form or format of report however the report must be sufficient to communicate to the intended users the scope of the assignment, the work performance and the conclusion reached. The report should also be sufficient for an apropriately experienced valuation professional, with no prior involvement with the valuation to review the report and understand it

The report must convey, at a minimum The scope of work must be performed, including the elements noted in para 20.3 of IVS 101 to the extent that each is applicable to the assignment The approach or approaches adopted The methods or methods adopted The key inputs used Assumptions made Conclusions of value and principal reasons for conclusions reached Date of valuation Valuation review reports must convey at a minimum Scope of review performed included items in IVS 101 20.3 The valuation report being reviewed and the inputs and assumptions upon which the valuation is based The reviewers conclusions including supporting reasons Date of the report

IVS 104 Bases of value   

Compliance with this mandatory standard requires a valuer to select the appropriate basis of value and follow all applicable requirements with that basis of value Basis of value describe the fundamental premises on which the valuation will be based. It must be aprops to the terms and purpose of the valuation as a basis of value may influence or dictate a valuers selection of methods, inputs and assumptions and the ultimate opinion of value

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A valuer may be required to use a bases of value that are defined by statue, regulation, private contract or other document Most bases of value have certain comment elements; o Assumed transaction o Assumed date o Assumed parties IVS Defined bases of value o Market value o Market rent o Equitable value o Between two defined, knowledgable and willing parties o Investment value o Value to a particular participant o Synergistic value o Combination value o Liquidation value o Assets sold on a piecemeal basis Other bases Fair value o IFRS o Fair market value o Fair value o Fair rent Valuers must choose the relevant basis according to the terms and purpose of the valuation. It must be aprops o

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Premise of value/assumed use Describes the circumstances of how an asset is used. Common premises of value are; o o o o o o o o

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Highest and best use Physical possibl, legally permissible and financially feasible Current use/existing use The way currently used Orderly liquidation Reasonable selling period of assets compelled to be sold Forced sale Proper marketing may not be possible. Need to specify what restraints on sales process apply Entity specific factors Factors that may not be available to participants o Additional value or reduction in value from the creation of a portfolio of assets o Unique synergies between the asset and other assets owned by the entity o Legal rights, tax benefits Assumptions and special assumptions generally fall into 2 categories Assumed facts that are consistent with or could be with, those existing at the date of valuation

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Assumed facts that differ from those existing at the date of valuation / special assumptions

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Examples of assumptions include An agreement to lease is formalised into a deed of lease Stated contract rents are actually being paid Examples of special assumptions include Proposed building has been completed Certain level of pre leasing / pre sales will be achieved Resource consent is obtained

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IVS105 valuation approaches and methods 

Consideration must be given to the relevant and appropriate valuation approaches.

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The principal valuation approaches are Market approach Income approach Cost approach The most appropriate approach should be selected under the particular circumstances and should consider o Appropriate based of value and premises of value determined by the terms and purpose o The strengths and weaknesses of approaches and methods o Nature of the asset and approaches/methods used by participants o The availability of reliable information Valuers are not required to use more than one approach. Multiple approaches should not be used when there is uncertainty. Outcomes should be reconciled into a single conclusion - not averaged o o o

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If the outcomes of multiple approaches are widely divergent a Valuer should perform procedures to understand the differences and consider whether on of the approaches/methods provides a more reliable indication of value Valuers should maximise the use of relevant observable market information in all three approaches. Although no one approach or method is applicable in all circumstances price information from an active market is generally considered to be the strongest evidence of value Market approach

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Should be applied and afforded significant weight when The subject asset has recently been sold in a transaction appropriate for consideration under the basis of value The subject asset or substantially similar assets are actively traded There are frequent and/or recent observable transactions in substantially similar assets

Even when not using the market approach, the use of market based inputs should be maximised in the application of other approaches - rents, yields, discount rates

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Market approach methods Comparable transaction method Key steps Identify the unit of comparison used by participants Identify the relevant comparable sales and calculate key metrics Perform a consistent comparative analysis of qualitative and quantitative differences between th transactions and subject Make necessary adjustments to reflect differences Apply the adjusted metrics to the subject If multiple metrics used, reconcile output

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A valuer should choose comparable transactions considering Several transaction preferable to a single transaction Very similar assets provide the best comparision Most recent transactions Generally arms length Sufficient information available and reliable Actual transactions preferable to intended transactions Examples of common adjustments Material characteristics - age, size, specification Restrictions Location Income Expected growth Yields Unusual terms Ownership characteristics

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Guideline publicly traded comparable method Utilises information on publicly traded comparable that are the same or similar to the subject asset. Similar to comparable transactions method however differences o Valuation metrics/comparable are available at valuation date o Detailed information is available o Comply with recognised accounting standards Key steps o Identify the valuation metrics/comparable used by the participants o Id the relevant guideline publicly-traded comparable and calculate key valuation metrics o Perform a consistent analysis of qualitative and quantitative similarities/differences o Make necessary adjustments o Apply adjusted metrics

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A valuer should choose comparables considering Multiple comparables preferable to a single comparable Evidence from similar publicly traded comparables preferable Actively traded securities perferable to thinly-traded securities Examples of common adjustments Material characteristics Age

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Size Specification Relevant discounts and premiums Restrictions Location Profitability Growth Marketability and control characteristics Ownership characteristics

Income approach  

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The income approach provides an indivation of value by converting future cash flow to a single current value. Should be afforded significant when o Income producing ability is the critical element affecting value from a participant perspective o Reasonable projections of the amount and timing of future income are available but few relevant market comparables Should also consider other approaches when; o The income producing ability is only one of several factors affecting value o There is significant uncertainty on timing and amount of future income o Lack of access to information on the asset o Has yet to produce income but project to do so Income approach methods Discounted cash flow method Future cash flow is discounted back to valuation date to give the present value For long life assets the DCF may include a terminal value - estimated value at end of explicit projection periods Key steps in DCF

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Choose aprops type of cash flow - pre/post tax, real/nominal Determine most aprops explicit period Prepare cash flo...