Day of Conveyancing

Highlights 2015Valuation Advisory Services

6 November 2015Principles of Property Valuation. Is it an Art or Science?

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Real estate touches everyone's’ lives.An illustration of activities in a day.

Home Car, Bus, Train

Tuition Centre

Work Shopping Holiday

Home

Price /

Rental

Parking

cost

Tuition

fees

Operating

Cost

Cost of

goods and

services

Cost of

hotel stay

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What is Valuation?

Art

Science

• Knowledge or system of knowledge covering general truth

• Operation of general laws especially as obtained and tested through scientific method

source: www.merriam-webster.com

• Art or process of valuing

• Estimated or determined market value of a thing

• Judgment or appreciation of worth

• Skill acquired by experience, study or observation

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Definition of Price, Cost and Value

Price

• Amount asked

• Amount paid for good and services

Cost

• Price paid for good and services

Value

• An estimate of worth of good and services

• At given time

• Defined parameters

Price

CostValue

Asking Price/Purchase Price

Assessment Historical

Source: SISV

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What is Valuation?

What it is not

• It is not just a mathematical process

What it is

• It is both an art as well as a science

• Process requiring:-

- Understanding valuation concepts and principles

- Observation of trends

- Analysis of trends

• It is the process of assessing the market worth of a property at a particular moment in time

for a specific purpose

• It has to take into account all the features of the property and all underlying factors of the

market

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Roles of Valuer

• Interpret market

• Specialists

• Independent assessment

• Work impact on the financial system

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Types of Values

Market Value

• A willing seller; willing buyer

• A reasonable period for the whole process

• Buyer has no special interest

• That both parties to the transaction had acted knowledgeably, prudently and without compulsion

• Highest & best use concept

Existing Use Value

• Similar to market value

• Existing use for future

• No development or redevelopment value

Forced Sale Value

• Similar to market value

• Limited time for marketing and sale

Reinstatement Value

• Cost of reconstructing building in a condition equal to its condition when new.

• No better or more excessive

• Includes allowances for professional fees

Each value has its specific function

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Determinants of Property ValuesNot just a mathematical process

Micro Factors

(General)

Micro Factors

(Specific)

Types of

Property

Macro Factors

• Location

• Accessibility

• Age

• Design and Quality

• Size

• Use

• Facilities

• Status of repair and

maintenance

• Ambience

• Neighbours

• Fittings and Fixtures

Residential • Economic

• Political

• Geographical

• Legal

• Government

Policies

• Time Element

• Pedestrian flow and catchment area

• Design and layout

• Tenant mix

• Management

• Particular floor and location

• Frontage

Retail

• Prestige

• Proximity of relative uses

• Running costs

• Window

• Flexible layout

Office

• Practicality

• Adaptability

Industrial

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Valuation ProcessSystematic and thorough

Stage 4

Analysis &

Reporting

Taking instructions:

• Identify property

• Purpose of valuation

• Date of valuation

• Schedule an

appointment for

inspection

Stage 1

New

Valuation

assignment

Stage 2

Site Inspection

Stage 3

Data

Collection

Obtaining data:

• Title search

• Planning guidelines

• Rental data

• Floor plans

• Comparables

Visiting actual site:

• Subject property

• Surroundings

• Photographic

evidence of physical

condition of subject

and comparables

Analyzing data:

• Determinate value

using one or more

methods

• Prepare valuation

report.

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Methods of ValuationThe different approaches are usually independent of each other.

Direct Comparison

• Recent sales of comparable properties in the vicinity

• Due adjustments will be made for differences between the subject property and the comparables in terms of location, tenure, size, shape, design and layout, age and condition of buildings, dates of transactions and other factors

Income Approach

• This method takes into consideration the gross annual rental and of the outgoings such as property tax, ground rent, promotion and maintenance charges.

• The net annual income is then capitalized at a rate we consider appropriate from our experience and knowledge of similar properties in order to reflect the certain and potential risks acceptable to a prudent investor.

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Methods of ValuationThe different approaches are usually independent of each other.

Residual Approach

• Estimation of the open market value of the proposed development assuming it is completed

• Various estimated costs of development such as construction costs, professional fees, financial and holding charges on the land and construction, developer's profit, cost of sale, promotion and legal fees are deducted

• Arrive at the residual value which a prudent developer could afford to pay for the site with all its potentialities.

Depreciated Replacement Cost

• Land Value + Replacement cost of building

• Deductions are made for the age, condition, economic or functional obsolescence and environmental factors etc; all of these might result in the existing property being worth less to the undertaking in occupation than would a new replacement.

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Purpose of ValuationIt is the fundamental of real estate-related transactions.

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START

Purposes

• Public Offering (IPO)

• Merger & Acquisition

• Balance Sheet

• Sale & Purchase

• Mortgage / Financing

• Rental Reviews

• Stamp Duty Tax

• Fire Insurance

• Property Tax

• Compulsory Acquisition

• Valuation

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Valuation – Challenges

Issues

• Valuation Parameters- Highest and best use definition

- Selection of comparable (rent or capital value)

- Method of valuation

• Quality of Information- Verification and validation

• Regulations- Valuation Standards and Practices

- Policy Changes

- FRS

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Conclusion

“Man is unique not because he does science, and his

is unique not because he does art, but because

science and art equally are expressions of his

marvellous plasticity of mind.”

Jacob Bronowski, The Ascent of Man

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Art or Science

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References

• www.merriam-webster.com

• Singapore Institute of Surveyors and Valuers (SISV) – Valuation Standards and Practice

Guidelines (2015 Edition)

COPYRIGHT © JONES LANG LASALLE 2014

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