Valuation Methods PDF

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Valuation Methods, Concepts and ApplicationClasses of Property: (All can be broken down into sub classes)  Residential = Dwellings, units, duplex, terrace, villa, townhouse etc  Retail  Commercial  Industrial  Rural  Special usesValuation Methodology:  Valuation methodology is the process of ...

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Valuation Methods, Concepts and Application Classes of Property: (All can be broken down into sub classes)  Residential = Dwellings, units, duplex, terrace, villa, townhouse etc  Retail  Commercial  Industrial  Rural  Special uses Valuation Methodology:  Valuation methodology is the process of analysing sales and leasing transactions and applying the results from analyses using various methods to value the subject property  When valuing a property, when possible it is useful to use a check method of valuation, particularly when there is limited evidence Methods of Valuation: 1. Direct comparison 2. Summation 3. Capitalisation / Income method 4. Residual 5. Hypothetical development 6. Discounted cash flow Types / Methods: 1. Residential - DIRECT COMPARISON / INCOME · Houses · Units · Townhouses / Villas · Residential Flat Buildings · Company title property 2. Retail (Shopping Centre) · Capitalisation net rents · Direct comparison $/m squared net area (check) · Discount cash flow (NPV's) 2. Retail (Rent Reviews) · Direct comparison $/m squared · Income 3. Commercial · Capitalisation net rents · Direct comparison ($/m squared NLA) · Income (PCA method of measurement) 4. Industrial (Warehouse / Factories) · Capitalisation net rent · Direct comparison $/m squared 5. Special Uses (Town Hall, Churches, Schools)

What is a Valuation & Why are Valuations Undertaken?: Location / Market / Age / Condition / Improvements / Neighbourhood

Valuation - A measurement of value at a specific point in time Valuation Risks and Profiles: · Valuations are required for a variety of purposes and uses · For the property valuer, each use has a different risk profile · The key Valuation Purpose - Stamp Duty · Stamp duty on the transfer of property · Vendor duty on transfer · State govt tax · CGT (capital gains tax) on the transfer of property - Cost base - Determine value · Federal govt tax · Compulsory Acquisition - Taking of land for a public purpose by the crown · Rating and Taxing - Annual land values for Govt / Objections against land values · Mortgage - Purchase or Refinance Property · Family Court - Property / Asset settlements · Purchase or Sale - Advice to buyer or seller on value · Market Rent Reviews - Retail commercial and Industrial property at nominated intervals in leases require rents to be reviewed to market · Ratchet clause (says rent can never go backwards) · Feasibility Study - Gross realisation of development / Development site value Definition of Value

Market Value: Market value is the most common type of value required Represents a consensus between a buyer and seller This type of transaction allows a party to assess their situation as to disposing or acquiring real estate

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Spencer v The Commonwealth of Australia (1907) 5 C.L.R · 1907, Justices Isaacs, Barton and Griffiths examined the concept of market value in the Spencer case and established a set of principles known as the MARKET VALUE PRINCIPALS Market Value Principals: 1. Hypothetical buyer and seller are considered to be willing to negotiate 2. Both parties are assumed to be fully aware of all factors that could have affected the value 3. C 4. The parties are amicable and the sale is "at arms length" 5. The price reflects the highest and best use 6. Parties are business like in their decisions In 1993 Australia adopted the International Assets Valuation Standards definition of market value:

Valuation Reports The Valuation Process  Where does a valuer start?

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1. 2. 3. 4. 5. 6. 7. 8. 9.    

A client requires a valuation of a building / dwelling for? What are the steps involved? Receive instructions - evidence of request. Then, what information do you need? Property ID - What can you get from the office before you leave???? How do I get access? Inspection equipment (Tools of trade) Locality / UBD Street guide (What information can I get from a street directory?) Mathematical process Subject property detail REMEMBER, the collection and analysis of market data is a fundamental part of all property valuation. Market evidence is central to the valuation process. Adjustments to a report - Consider the number of adjustments. The less adjustments, the more likely it is that results of your analysis will produce a sound valuation. Verification of sales - scheduling of sales information – spreadsheet if necessary.

Consider comparability? Sales v Subject Issues: 1. Property markets / segments 2. Size of property 3. Character of property 4. Distance to subject 5. Time of transaction The Valuation Report  A valuation report leads the reader from the definition of the valuation problem through analysis and relevant descriptive data to a specific conclusion. (Full speaking valuation report) Steps to completing a Valuation Report  Instructions, research  Inspect subject & sales  Report]  Remember and Save Instructions & Authority Letter of instructions (Basic details) 1. The property details 2. Client’s requirements 3. The purpose  BUT consider additional information, Interest, owner occupied / tenant, access, FEE. Supporting Documentation  Cert. Of Title  Deposited Plan  Survey  149 Cert  Building plans  copy of contract  lease

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property outgoings trading figures environmental assessment

Letter of Confirmation  Confirm the request / fee  Define the terms of reference  Request more detail if necessary (Access, plans etc) The Report Presentation  Report purpose  Presentation (Word processors)  Language (Clear, concise, etc) Types of Reports  Curbside  Desktop  Residential Short / Long Form (elite / prestige)  Construction Report & Long form (elite / prestige)  Commercial Report  Rural Report  Progress Inspection + Final (elite / prestige)  Commercial / Rural Progress

Income/Capitalisation Method Income or Capitalisation Method  Where do you use this method  Office buildings  Retail shop premises  Holiday units  Shopping centres  Hotels & motels  Bottle shops  The capitalisation approach assumes that the income is in perpetuity and the rate adopted implicitly, has regard to growth, risk, long term capital expenditure and depreciation.  The capitalisation method is a static or direct approach where the income stream can be related to the capital value or sale price of a property and expressed as its yield.  This yield is the return on investment and its termed by valuers as the capitalisation rate. Factors Affecting Capitalisation Rates  Security of the rental flow  Business type  Class of tenant (Retail, Child care, etc)  Terms & conditions of the lease  Demand for the space  Strength of the centre / location  Supply of future developments  Vacancies in the locality

Expenses excluded from outgoings  Any renovations or improvements to the building  Alterations or additions to the improvements  Replacement of plant and machinery  Financing costs, repayments or interest on borrowed funds  Personal costs relating to the owner such as income tax Mechanics of capitalisation  Gross rent  Outgoings  Net rent  Sale price or value  Cap rate or yield  If you know the sale price and rent, a cap rate may be deduced.  If you know a sale price you may adopt a rent from the similar property to value the subject property Formulas Due to the relationship of the sale price, capital value, asset valuation, etc. with the income and outgoings so the capitalisation rate can be determined / derived.

1. NET Income* 100 = Cap rate Sale price # capitalisation rate or yield Example:  A shop has a net income of $45,000 and sold for $750,000. What is the yield on this investment?  ANSWER: $45,000 / $750,000 * 100 Yield = 6%

2. NET Income / Cap Rate = Capital value Example:  A shop has a net income of $45,000. Sales in the area show a return of 6%. What is the value of the property?  ANSWER: $45,000 / 6 * 100 = $750,000

3. Capital value / 100 * Cap. Rate = NET Income Example:  A shop has a value of $750,000. Sales in the area show a return of 6% What is the net income for the property?  ANSWER: $750,000 / 100 * 6 = $45,000

4. Years Purchase    

The Capitalisation rate can also be expressed as the “Year’s Purchase” Say 5% yield / Cap. Rate OR The number of years to buy the property Equates to: ANSWER 100 / 5 = 20 years

Know your rents  Gross rent (The rental derived where all operating costs on the property are included)  Net rent (The rent to the owner free of all outgoings/expenses)  Peppercorn  Passing rent

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Turnover rent Profit rent Market rent Economic rent Contract rent / Face rent / Base rent Controlled rent Gross rent / Net rent EFFECTIVE RENT (allows for incentives)

Where does Income Come From?  Rent  A tenant's regular payment to a landlord for the use of property or land.  Willing buyer (lessee)  Willing seller (lessor)  Values (rent)etc...