Valuation Essay PDF

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Summary

Art or Science The art, or science, of estimating the value, for a special purpose, of a particular interest in property, at a particular moment in time, taking into account of all the features (attributes) of the property and also considering all the underlying economic factors of the market, inclu...

Description

Art or Science The art, or science, of estimating the value, for a special purpose, of a particular interest in property, at a particular moment in time, taking into account of all the features (attributes) of the property and also considering all the underlying economic factors of the market, including the range of alternative investments (French, 2002) – How you gather the information for proving Judgement with evidence (proving) “Market comparison approach is regarded as the most reliable method of valuation”, Li (2009) “agree with this assertion to the extent that the market is a normal one without an out-of-proportion influence of speculation” Art ● ●

How you gather the information for proving Rely on the judgement of the valuer for choosing the valuation methods and attributes to reflect the market and estimate the value ○ Comparative method / Investment method / Residual Method / Profit Method / Contractor Method (type & nature of valued property, availability of comparables, purpose of valuation) ○ Comparables for comparative method ■ Statistical Trend for reflecting time adjustment (RVD vs others) ■ Date ■ Sources of comparables ■ Adjustment factor ○ Market value and yield for investment method ○ Discount rate for Investment method and DCF method ○ Decapitalization rate of Contractor Method ○ Adjustment on accounts for profit method ○ Choosing comparables with similar business scale and nature for comparing the trading account for profit method ○ fair maintainable turnover by adjustment on the profit based on the judgement on valuer ○ Weight for weighted method ○ Cross-checking

Science ● The valuation method are systematic approach based on the logical procedures and calculation (DCF method) ● A lot of researches must be done to provide the evidence supporting the decision of valuation method, attributes and factor used to reflect the market and estimate the value ○ Recent and comparables transaction records (Comp) ○ Financial Statements of the company regarding the use of property (Profit) ○ relevant research such as finding out rental comparables and yields acceptable for similar buildings. This objective evidence is then used to formulate and support the valuer’s opinion (Investment) ● The valuation must be supported by evidences and a valuer must be able to explain their opinion with reference to evidence (e.g. showing comparable sales evidence)

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Reconciliation is based on the calculated result Measurement-based, empirical and based on observation and evidences

Valuation purpose ● The art, or science, of estimating the value, for a special purpose, of a particular interest in property, at a particular moment in time, taking into account of all the features (attributes) of the property and also considering all the underlying economic factors of the market, including the range of alternative investments (French, 2002) ●

Property valuation involves the estimation of the value of a particular property for a specific purpose at a particular point in time The process of estimating the market value (or market rent) of a property in advance of a sale/renting (Isaac & O’Leary, 2013)

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Market value : “money obtainable from a person or persons willing and able to purchase an article when it is offered for sale by a willing seller” (Millington, 2000)

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Five major valuation functions : ○

Transfer of ownership

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Extension of credit (mortgages)

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Compensation for damage or loss

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Taxation / Rating

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Land use studies

Scarrett and Osborn (2014) ○

Sale or purchase of a property interest

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Letting or leasing of a property interest

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Development feasibility and appraisal

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Alternative use valuations (investment)

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Valuations for financial reporting

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Valuation for secured lending

Specific purposes: ○

Rental valuation

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Capital valuation

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Valuation for sales and purchase

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Valuation for mortgage

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Valuation for forced (distress) sale

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Valuation for auction

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Valuation for investment

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Current use value

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Development value

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Value for land (Compulsory Sale for Development/redevelopment) Ordinance, Cap 545

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Valuation for insurance

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Valuation for taxation and rating (RVD / Inland Revenue)

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Valuation for Compulsory Purchase (Resumption for infrastructure)

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Other purposes

Comparable is the basis of all valuation According to Li (1999), comparative method is the most reliable approach to reflect the market if ample comparables are available. Since the purpose of valuation is to estimate the market value of the subject property at the specific point of time by considering the underlying economic factors and market, it does match the basis of all valuation because the details included in the recent comparables can reflect the market and underlying economic factors, given that ample amount of comparables are available. ●

Comparative Method ○

Recent transaction records of the residential properties with similar conditions to reflect the market value by isolating and analyzing the attributes.

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Investment Method ○

The market value and yield of the similar investment properties to estimate the yield of the subject properties

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Office tower

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Shopping malls

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Shops

Residual Method ○

Making reference to land sales and hence adopting the Market Comparison Method is considered the best method of valuation for development land, if relevant comparable site sales are available. If the sites are directly comparable, they may form the principal method of assessment. (HKIS, 2017)

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GDV determination ■

Residential developments’ GDV is estimated by comparative method

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Office building is by investment method, but the yield is obtained by comparables

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Profit Method ○

Compare the company with similar business scale and nature to adjust the trading account for the subject property → reflect the value

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Contractor Method ○

Only be used when no transactions are available

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Market is determined by Demand & Supply, not cost of construction

By the analysis of comparables, the demand and supply of the market can be reflected Real Estate Property

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Illiquid, individual, high transaction cost, heterogenous

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Long-term in nature and subject to market cycles

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Proof of ownership

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Management skills required

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Social status

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Hedge against inflation

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Subject to a wide range of statutory/non-statutory controls: ○

- Legislation affecting ownership and title

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- Landlord and tenant legislation

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- Planning legislation

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- Building legislation (Recent catastrophic accidents in industrial buildings which had been illegally converted into subdivided self-contained units)

Value both the freehold and leasehold interests in shop premises which have just been let on a 21 year lease at a rent of $4,000 p.a. for the first 7 years, $6,000 for the next 7 years and $8,000 for the remainder of the term. The current full rental value of the shop is $8,000 p.a. The freehold yield in the market is found to be 7%, whereas a half-percentage should be deducted from the yield to reflect the lower risk of the more-secured rental to be received at $4,000 and $6,000 respectively. In regard to the leasehold interest, since the risk of leasehold interest is generally higher than that of freehold interest, the difference is reflected by a one-percentage higher on the yield of leasehold interest compared to the freehold yield. Furthermore, the leasehold interest may also help generate a 3% return by use of a sinking fund...