REAL PROPERTY VALUATION APPROACHES AND ITS ACCURACY IN

HAWASSA CITY

MSc. THESIS

YASIN YAKOB ASHANGO

HAWASSA UNIVERSITY, HAWASSA, ETHIOPIA

DECEMBER, 2019
REAL PROPERTY VALUATION APPROACHES AND ITS ACCURACY IN
HAWASSA CITY

YASIN YAKOB ASHANGO

A THESIS SUBMITTED TO THE DEPARTMENT OF

CONSTRUCTION TECHNOLOGY AND MANAGEMENT,

HAWASSA INSTITUTE OF TECHNOLOGY,

SCHOOL OF GRADUATE STUDIES

HAWASSA UNIVERSITY

HAWASSA, ETHIOPIA

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE

OF

MASTER OF SCIENCE IN CIVIL ENGINEERING

(CONSTRUCTION TECHNOLOGY AND MANAGEMENT)

DECEMBER, 2019
 SCHOOL OF GRADUATE STUDIES

HAWASSA UNIVERSITY

ADVISOR‟S APPROVAL SHEET

This is to certify that the MSc thesis entitled “Real Property Valuation Approaches
and its Accuracy in Hawassa City” submission in partial fulfillment of the
requirement for the degree of Master of Science with specialization in Construction
Technology and Management, the graduate program of department of Civil
Engineering and has been carried out by Yasin Yakob (Id No PGCoTM/051/10)
under my supervision. Therefore, I recommend that the student has fulfilled the
requirements and hence, hereby can submit the thesis to the department.

Girmaye Kahasay (Dr Ing.) ___________ ___________

Name of Advisor Signature Date

Bereket Amare (MSc.) ___________ ___________

Name of Co-Advisor Signature Date

 SCHOOL OF GRADUATE STUDIES

HAWASSA UNIVERSITY

EXAMINER‟S APPROVAL SHEET

We, the undersigned, members of the Board of Examiners of the final open defense
by Yasin Yakob Ashango have read and evaluated his thesis entitled “Real Property
Valuation Approaches and its Accuracy in Hawassa City”, and examined the
candidate.

This is, therefore, to certify that the thesis has been accepted in partial fulfillment of
the requirements for the Degree of Masters of Science in Construction Technology
and Management.

Girmaye Kahasay (Dr Ing.) _____________ _______________

Advisor Signature Date

Dr G/kirstos Nuriye _______________

Internal Examiner Signature Date

Dr Belachewu Asteray _____________ _______________

External Examiner Signature Date

Handebo Ayele (MSc) _____________ _______________

Chairperson Signature Date

____________________ _____________ _______________

SGS Approval Signature Date

 DECLARATION

I declare that this thesis entitled “Real Property Valuation Approaches and its
Accuracy in Hawassa City” is my original work. This thesis has not been presented
for any other university and is not concurrently submitted in candidate of any other
degree, and that all sources of material used for the thesis have been duly
acknowledged.

Yasin Yakob

Signature:_____________
 ACKNOWLEDGEMENT

First of all, I would like to thank almighty God for giving me the courage and strength
to finish this study successfully. I would also wish to thank my family, friends, and
colleagues for their support, encouragement and understanding during the period of
carrying out the study.

Next my deepest gratitude goes to my thesis advisor Dr Ing Girmaye Kahasay, for his
advices, encouragement, and support from the beginning to the success of the research. I
also would like to thank my all academic staff members who contributed in one way or
another to the success of the study. I am also deeply grateful to Mr. Bereket Amare for
his comments and excellent advice throughout the preparation of this research.

I am indebted, in a special way, to ERA for giving sponsorship, and Hawassa university
Technology Institute department of Construction Technology and Management for
giving steady leave for making my study program feasible.

My devoted thanks go to all real property valuation experts of Dashen Bank,

Commercial Bank of Ethiopia, Awash International Bank and Cooperative Bank of
Oromia, in Hawassa City districts for their constructive advice, openly sharing manuals,
moral and material support in the course of my study. My deepest thanks also go to Ato
Tesfaye Gebeyehu GIS and urban planning expert for giving constructive and helpful
advice on area of real property valuations.

Wholeheartedly, I would like to express my humble and sincere thanks to Ato Abebawu
real property valuation expert in Dashen bank, for his expertise contribution and
constructive criticisms on my work without which, this work would not have
materialized. Contribution he made into this work is invaluable and I have no word to
express my deeply felt thanks. Thanks a lot Ato Abebawu.

Finally, I would like to express my appreciation to all organizations and individuals who
contributed directly or indirectly to this research and provided the necessary materials
and support for realization of this research.

I
 TABLE OF CONTENTS
ACKNOWLEDGEMENT ................................................................................................. I

LIST OF TABLES ........................................................................................................... V

LIST OF FIGURES .......................................................................................................VII

LIST OF ABBREVIATIONS AND SYMBOLS ........................................................ VIII

LIST OF TABLES AT APPENDIX ............................................................................... IX

ABSTRACT..................................................................................................................... X

1. INTRODUCTION ........................................................................................................ 1

1.1 Background of the Study......................................................................................... 1

1.2 Problem Statement .................................................................................................. 3

1.3 Research Questions ................................................................................................. 4

1.4 Research Objectives ................................................................................................ 4

1.4.1 Main Objective ................................................................................................. 4

1.4.2 Specific Objective ............................................................................................ 4

1.5 Significance of Research ......................................................................................... 5

1.6 Scope and limitation of Research ............................................................................ 5

2. LITERATURE REVIEW ............................................................................................. 6

2.1 Definition of Terms ................................................................................................. 6

2.2 Concepts of Real Property Valuation ...................................................................... 7

2.3 Major Determining Elements of Value ................................................................... 9

2.4 Property Valuation ................................................................................................ 10

2.5 Property Valuer ..................................................................................................... 11

2.6 Purpose of Valuation ............................................................................................. 13

2.6.1 Valuation for Mortgage .................................................................................. 13

2.6.2 Valuation for Compensation........................................................................... 16

2.6.3 Valuation for Insurance Risk Assessment ...................................................... 17

2.6.4 Valuation for Taxation ................................................................................... 18

II
 2.6.5 Valuation for Development ............................................................................ 18

2.6.6 Valuation for Financial Statements ................................................................ 19

2.7 Approaches of Property Valuation ........................................................................ 20

2.7.1 Sales Comparison Method .............................................................................. 22

2.7.2 Investment Method/Income Capitalization Method ....................................... 24

2.7.3 Replacement Cost Method ............................................................................. 25

2.8 Accuracy of Valuation .......................................................................................... 26

2.9 International Practices and Evidences on Property Valuation .............................. 28

2.10 Banking History and Its Property Valuation Practice in Ethiopia ...................... 34

2.11 Real property Valuation Approaches in Hawassa City ....................................... 37

2.11.1 Introduction .................................................................................................. 37

2.11.2 Assessment of Real property Valuation Approaches of Banks in Hawassa

City .......................................................................................................................... 39

3. RESEARCH METHODOLOGY ............................................................................... 51

3.1. Description of the Study Area .............................................................................. 51

3.2 Research Design .................................................................................................... 52

3.3 Selection of Cases ................................................................................................. 53

3.4 Data Sources and Collection Methods .................................................................. 54

3.4.1. Primary data................................................................................................... 54

3.4.2 Secondary Data and Document Analysis ....................................................... 54

3.4.3 Sample Size and Sampling Method ............................................................... 55

3.5 Methods of Data Analysis ..................................................................................... 55

4. ANALYSIS AND DISCUSSION .............................................................................. 57

4.1 Survey Result ........................................................................................................ 57

4.2 Analysis of Data from Questionnaires and Interviewee ....................................... 57

4.2.1 Assessment of Real Property valuation Approaches Used ............................. 59

4.2.2 Comparison of Banks Valuation System with Detail Costing ....................... 59

III
 4.2.3 Possible Causes of Valuation Variance and Inaccuracy of Banks in Hawassa
City .......................................................................................................................... 61

4.3 Case Study on Selected Properties in Hawassa City ............................................. 63

4.4 Discussion on Assessment of Real Property Valuation Approaches Used by Bank

in Hawassa City......................................................................................................... 101

5. CONCLUSION AND RECOMMENDATION........................................................ 104

5.1 Conclusion........................................................................................................... 104

5.2 Recommendation................................................................................................. 106

BIBLIOGRAPHY ......................................................................................................... 107

Appendix-1 Possible Causes of valuation Variances ................................................... 109

Appendix-2: Construction/ Improvement Cost of Property A ...................................... 111

Appendix-3: Construction/ Improvement Cost of Property B ...................................... 112

Appendix-4: Construction/ Improvement Cost of Property C ...................................... 113

Appendix-5: As Built BOQ of Property D ................................................................... 114

Appendix-6: Summary of as Built BoQ of property E. ................................................ 115

Appendix-7: Summary of as Built BoQ of property F. ................................................ 116

Appendix-8: CBE - Location Value for Hawassa city ................................................. 117

Appendix-9: Building Condition Factor (Depreciation Deduction Factors) ................ 118

Appendix-10: Questionnaires and Questionnaire Interviewee ..................................... 119

IV
 LIST OF TABLES

Table 2-1 List of Banks in Hawassa City ....................................................................... 38

Table 2.2 Construction Class/Grade, Building Elements and its Material Details ......... 40
Table2. 3 Construction Grading and Range in Percentage of Building Elements .......... 47
Table 4.1 Numbers of Questionnaires Distributed, Returned and Response Rate ......... 57
Table 4.2 Respondents Educational Qualification .......................................................... 57
Table 4.3 Respondents relevant work experience .......................................................... 58
Table 4.4 Respondents Result on Existence of Valuation Variance and Inaccuracy in
Practice in Banks of Hawassa City ................................................................................. 60
Table 4.5 Valuer‟s opinion on variance of valuation acceptance margin ....................... 60
Table 4.6 Level of Customer‟s Satisfaction on Valuated Result of their Property by
Banks .............................................................................................................................. 61
Table 4.7 Properties Selected for a Case Study in Hawassa ........................................... 64
Table 4.8 Detail breaks down of property A .................................................................. 65
Table 4.9 Dashen Bank Construction Grade and Banks Rate ........................................ 66
Table 4.10 Construction Class and its Cost of Awash International Bank of Hawassa
District ............................................................................................................................ 68
Table 4.11 Construction Grade and its Rate of COOP for Property A ........................... 69
Table 4.12 Construction Grade and its Rate of CBE for Property A .............................. 71
Table 4.13 Dashen Bank Construction Class and its Rate per sq.m for Property B ....... 72
Table 4.14 Awash bank construction grade and rate per sq.m for property B ............... 74
Table 4.15 Construction grade and its rate per sq.m floor of COOP Bank for property B
........................................................................................................................................ 75
Table 4.16 CBE, Total Constructed Floor Area and its Factor in Birr Per Weight Per sq.
Meter for Property B ....................................................................................................... 76
Table 4.17 Construction Grade/class and its Rate of Awash International Bank for
Property C ....................................................................................................................... 77
Table 4.18 Construction class and its rate per sq.m of Dashen bank for property C ...... 78
Table 4.19 Construction Class and its Rate of COOP Bank for Property C ................... 79
Table 4.20 Total Floor Area and its Weight or Factor per sq.m Floor of CBE for
Property C ....................................................................................................................... 80
Table 4.21 Construction Class and its Rate in Birr per sq.m of Dashen Bank for
Property D ....................................................................................................................... 81

V
Table 4.22 Construction Class and its Rate per sq.m of Awash International Bank for
Property D ....................................................................................................................... 83
Table 4.23 Construction Class and Rate of COOP Bank for Property D ....................... 84
Table 4.24 Total Constructed Floor and its Rate per Factor per Floor Area in sq.m ..... 85
Table 4.25 Construction Class and its Rate of Dashen Bank for Property E ................. 86
Table 4.26 Awash International Bank Construction Class and its Rate for Property E . 88
Table 4.27 COOP Bank Construction Class and its Rate for Property E ....................... 89
Table 4.28 CBE Total Constructed Area its Weight in Birr per sq.m for Property E .... 90
Table 4.29 Construction Grade and its Rate of COOP Bank for Property F .................. 92
Table 4.30 Construction Class and its Rate Per sq.m of Dashen Bank for Property F ... 94
Table 4.31 Construction Class and its Rate of Awash International Bank for property F
........................................................................................................................................ 95
Table 4.32 Total Constructed Area its Weight in sq.m Per in Birr of CBE for Property F
........................................................................................................................................ 96
Table 4.33 Comparison of Dashen Bank Valuation with Current Market Value ........... 96
Table 4.34 Awash International Bank Valuation Variation with Current Market .......... 97
Table 4.35 Summary of Valuation by COOP Bank with Current Market Value of
Properties ........................................................................................................................ 98
Table 4.36 Summary of Valuation of CBE with Current Market Value ........................ 99

VI
 LIST OF FIGURES

Figure 2-1: Factors That Affect Value of Property......................................................... 10

Figure 3-1 Administrative Map of Hawassa City .......................................................... 52
Figure 4-1 Chart Showing Educational Qualification in Percentages ............................ 58
Figure 4-2 Chart Showing Percentage of Work Experience from Respondents ............ 58
Figure 4-3 Valuation Variance Variables with its Mean Score ...................................... 62
Figure 4-4 Chart Showing Valuation of Dashen Bank with Market .............................. 97
Figure 4-5 Chart of Valuation Variation of Awash International Bank with Current
Market ............................................................................................................................. 98
Figure 4-6 Chart Showing Valuation Variance of COOP Bank with Current Market
value ................................................................................................................................ 99
Figure 4-7 Chart Showing Valuation Variance of CBE with Current Market Value ... 100

VII
 LIST OF ABBREVIATIONS AND SYMBOLS

ABNT Associagao Brasileira de Normas Tecnicas

BoQ Bill of Quantity

CBE Commercial bank of Ethiopia

CBB Construction and Business Bank

COOP Cooperative bank of Oromia

DBE Development Bank of Ethiopia

EBA Ethiopian Bankers Association

FEM Federation of European Mortgage

IFRS International Financial Reporting Standards

IVSC International valuation standard committee

HSB Housing and Saving Bank

HCAFED Hawassa City Administration Finance and Economic

Development

LML Land Management Law

NBE National Bank of Ethiopia

RICS Royal Institute of Chartered Surveyors

SACPVP South African Council for the Property Valuers Profession

SNNPRS South Nations Nationalities and Peoples Regional State

TEGoVA European group of valuers association

ISO International Standard Organization

USAID United States of America for International Development

USPAP Uniform Standards of Professional Appraisal Practice

VIII
LIST OF TABLES AT APPENDIX

Table A 1 Possible causes of Valuation Variance and Accuracy with in Banks .......... 109
Table A 2Detail Breakdown of Asbuilt BoQ for Property A ....................................... 111
Table A 3 Detail Breakdown of As built BoQ of Property B ....................................... 112
Table A 4 Detail Breakdown of Asbuilt BoQ of Property C ........................................ 113
Table A 5 Detail Breakdown of Asbuilt BoQ of Property D........................................ 114
Table A 6 Detail Breakdown of Asbuilt BoQ of Property E ........................................ 115
Table A 7 Detail Breakdown of Asbuilt BoQ of Property F ........................................ 116
Table A 8 Details of CBE location Values for Hawassa city ....................................... 117

IX
 ABSTRACT

Real Property market and its valuation practice in Ethiopia evolved through various
stages right from 1905 E.C due to establishment of Absiynia bank. In past major issue is
only related to ownership, but due to privatization, and related reasons property is now
seen as a good investment vehicle which requires proper pricing so as to ensure that
parties involved in any transaction are not economically short-changed. The value of
real property value valuated by banks is debatable due to variation between their
approach and current market value in detail cost to construct property. In most cases
different stakeholders have complaint on the value of the properties which are valued by
banks in Hawassa city. Assessment is done by questionnaires and interview on 17 banks
valuators in Hawassa City. Based on assessment done on banks in Hawassa City there
are variability in banks assessment and current market value of property. Additionally
assessment is supported by taking six valuated property as case study in four banks.
After assessment of those four banks valuation practices the properties are valuated
based on detail market replacement cost and comparative analysis done with market
value. The survey results and case studies shows that within that cost approach some
results are lower from market value and others are higher than property value by mean
value of +/- 17%, which ranges from(+/- 15% to +/- 20%) this in turn has impact on
clients as their property is used excess with under value and also created high customer
disatisfaction,in other hand over value creates high risk on banks that if customer is
unable to pay the loan, property value in forced sell can be lower than money paid in
advance for property. Finally from problems deemed as reason for valuation accuracy
political instability and problem of peace is ranked first among others. Lastly
recommendations set on participating stakeholders including higher education sectors
on issues related to improve valuation problems and inaccuracy in Hawassa city.

Key words: Banks, Hawassa City, Market Value, Property Valuation, Valuation
Accuracy

X
 1. INTRODUCTION

1.1 Background of the Study

Valuation can be defined as the process of estimating value. Valuation is an art

requiring judgment and forecast. It is purpose in which conclusions about value are
arrived at by a scientific analysis of the available data (1).The estimated selling price of
building is referred to as the open market value of that building (10).

Business dictionary definition of the noun „‟value‟‟ is amount of commodity, money,

etc. considered equivalent for something else; material or monetary worth of thing;
worth, desirability, utility, quantities on which these depend. A property value‟s
definition of value could be the present price for the rights to receive income and/or
capital in the future (9).

Market value of building is the most probable price, as of a specified date, in cash, or in
terms equivalent to cash, or in other precisely revealed terms, for which the specified
property rights should sell after reasonable exposure in a competitive market under all
conditions requisite to a fair sale, with the buyer and seller each acting prudently,
knowledgeably, and for self-interest, and assuming that neither is under undue duress
(30)

Real property valuation, also referred to as appraisal is carried out for many different
purposes their relative importance varying from one country to another. Purposes for
which a valuation may be required include sale or purchase, rent to be paid or
demanded, the amount of mortgage which could be advanced on a security, calculation
of compensation payable or receivable, assessment of taxation or rating and the
advisability of investment (3)

In carrying out any valuation assignment for collateral purposes or mortgage security,
the valuer is faced with a task of selecting the appropriate method to adopt. The value of
a property which is calculated by the bank for the purpose of collateral is debatable. The
borrowers have different outlook regarding the value of their property appraised by the
bank. They do believe the appraisal made by the bank is much less than the market

1
value of their property. The major causes for undervaluation and overvaluation is the
method of valuation that the banks are followed (32).

To achieve economic sustainability in property transactions requires proper assessment

of the value through accurate valuation. The principal issue in valuation accuracy is
standardizing the information set to ensure that all Valuers are equally informed.
Valuations are a function of information. The better the information set the better the
valuation. If a group of Valuers each have a different view of the market then the
distribution of valuations would have a wider variance than those which are based on
similar information. The spread of valuations will depend upon the completeness of the
information set. In fact it is the difference in interpretation of the information which
leads to possible transactions (2).

Real Property market and its valuation practice in Ethiopia evolved through various
stages right from 1905 E.C due to establishment of Absiynia Bank. Prior to what
operate now, and before status symbol and prestige were the main focus of property
ownership hence real property was not considered as investment opportunity. The result
therefore was there were few transactions that require valuation assignments. However,
with urbanization resulting from economic growth and Ethiopian government attention
to private sectors at recent era of 1994, demand for all forms of accommodation to meet
space requirements for the increasing spate of activities and population growth became
a serious issue to grapple with and this resulted in change of focus. Property is now seen
as a good investment vehicle which requires proper pricing so as to ensure that parties
involved in any transaction are not economically short-changed. To achieve economic
sustainability in property transactions requires proper assessment of the value through
accurate valuation (32).

Currently, Ethiopia is facing with rapid growing urbanization and modernization of

infrastructures. Most towns and cities in regions have been expanding twice their size
within the past ten years. After the downfall of the military junta, also called the Derg,
in 1991, Ethiopia opened its doors for foreign and national investment. It has been some
time since property valuation is practiced in Ethiopia. Properties are valued mainly for
compensation during expropriation, during forced sell by court order and for collateral
purpose. Moreover, recently the government has developed new master plans for

2
existing and newly established urban settlements. As a result, private investors working
with banks for infrastructure development like commercial/business center
development, residential buildings, and institutions. For those development private
sectors get financial assistance from bank by loans and for security of loans as advance
the properties are valuated and apprised as collateral (30).

As Hawassa City profile report by Hawassa city finance and economic development in
2016, there are factors that make investors to open their capital cost to Hawassa City.
These are suitable weather condition, natural attraction, friendly communities and
heterogeneity in residents, resulted in high rate of urbanization and housing shortages so
that there are investor‟s builds, buys and sells real properties for residences, commercial
purposes, storages and related service as per function of constructed buildings. On listed
purposes banks play great role by giving loans for private residences as well as large
commercial developments like Hotels and Resorts in Hawassa City. But to approve
loans, banks holds property as collateral to secure loans and collateral determination of
buildings/real property market values is still uses unscientific practices. The value of
real property value valuated by banks is debatable due to variation between their
approach and costs outlaid by clients to construct property. In most cases different
stakeholders have complaint on the value of the properties which are valued by banks in
city.

Now, in Hawassa City the pressing need for more sustainable development in general
and in real property markets in particular represents importance on property valuation
approaches and its accuracy. Thus, this study attempts to assess the valuation
approaches used by banks and its accuracy. The study also tries to analyze the
gaps/accuracy in the valuation approaches of the banks in Hawassa city by comparing it
with detail replacement cost of real property.

1.2 Problem Statement

It is a formidable challenge in Hawassa City owing to properly developed real property

market, among others. The real property value determined by banks for loan security is
approximate depreciated cost method. The borrowers have different outlook regarding
the value assessed by bank with their amount of money due to construct that real
property. They believe that amount appraised by bank is much less than the value of

3
their property. This is due to banks approximate cost assessment and its high variation
with detail cost of construction. So, that the clients still suffer from the inconsistency in
banks valuation with the money they invested and thinks that their properties got
disposed at values in excess of appraisal.

Additionally lands with buildings have value in market weather from lease agreement
or from aqusion by heridetary.Hence, proper valuation of, for instance, a given real
property value could be quite perplexing. Since, there is no developed market for the
land by banks on which such buildings are established or developed; there are problems
of valuating buildings by banks for bank finance purpose, At least valuation calculation
must be close to new construction cost of similar building.

1.3 Research Questions

More specifically this research attempt to answer the following questions:

What real property valuation methodologies are used by banks valuators for
bank financing?
What is amount of variation between their values with detail cost of properties/
current market value of properties?
What are factors deemed to cause variation?

1.4 Research Objectives

1.4.1 Main Objective

The main focus and aim of conducting this research is to Asses real Property Valuation
methodologies and its accuracy used in banks in Hawassa City.

1.4.2 Specific Objective

The specific objectives of the research are:

 To assess existing real property valuation methodologies of banks in Hawassa

city.
 To compare valuation methods used by banks with detail costing.
 To identify key problems deemed to be a cause of variation that arises in
building valuation undertaken by banks in Hawassa city.

4
1.5 Significance of Research

This study helps to know the real property valuation Methodologies and its accuracy in
Hawassa city. This paper have importance to both owner of the building and banks by
creating awareness on recommended factors to reduce valuation variation between
approaches used with detail costing/current market value.

This paper have great role to support decision by banks by revising their valuation
manual to process loan and collateral warranty easily for real property collateral
valuation and has consequential effect to increase valuation accuracy, to reduce variance
between real value of building and current market value in detail replacement costing.
Finally the paper add value on body of knowledge on areas of property valuation by
identifying variation factors to increase valuation accuracy, this in turn results on
enhancement of socio economic development.

1.6 Scope and limitation of Research

This paper entitled on Real Property Valuation Approaches and Its Accuracy is
conducted in Hawassa City by taking six buildings that are evaluated by different banks
in Hawassa. The findings regarding to this title is limited to real property valuations for
bank financing in Hawassa City and input data accuracy used.

5
 2. LITERATURE REVIEW

2.1 Definition of Terms

Property: The term property describes a legal concept; it refers to the rules that govern
people‟s access to and control of physical things (tangible assets) like land, natural
resources, and manufactured goods as well as of non-physical things (intangible assets)
such as inventions or contractual rights and financial claims (3).Property may be
categorized in various ways. Recognized legal categories include real property, personal
property, intangible property and cultural property (traditional medicines and goods or
products identified to a specific cultural community and context) (3) .

Real Property: refers to the ownership of land and its man-made improvements
attached to land e.g. buildings (4, 3)

Personal property: are categories of property includes movables such as equipment,

inventory, and personal goods (4, 3)

Intangible property: refers contract rights and insurance (4, 3)

Intellectual property: are properties includes copyrights, patents and trademarks (4, 3)

Cultural property: includes traditional medicines and goods or products identified to a

specific cultural community and context. Based on definitions, study focus only on real
property specifically building. So that real property and building can be used
interchangbly (4, 3)

Valuation: Merriam Webster dictionary defines the term valuation as, it is act of
process of valuing for appraisal of property or it is estimated value of property /
judgment or appreciation of worth of property. The term valuation has specific
professional definitions, the definitions of the RISC Appraisal and valuation standards
(28), the European valuation standards and the International Valuation Standards (19),
the essence is that a valuation is an estimate of the most likely selling price on the open
market, on the basis of both a willing seller and a willing buyer.

Property Valuation: Property valuation is the process of forming an opinion of value-

in-exchange under certain assumptions (31)

6
Valuer: is an individual, group of individuals or a firm who possesses the necessary
qualifications, ability and experience to execute a valuation in an objective, unbiased
and competent manner (20)

Accuracy: According to ISO 5725-1accuracy is general term used to describe closeness

of measurement result to true value.

2.2 Concepts of Real Property Valuation

The combination of rights associated with the ownership of real property is sometimes
referred to as the bundle of rights. The bundle-of-rights concept likens property
ownership to a bundle of sticks with each stick representing a distinct and separate right
of the property owner, e.g. The right to use, to sell, to lease, to give away, or to choose
to exercise all or none of these rights‟. Ownership of an asset other than land (vacant or
improved) is referred to as personal property which can be generally characterized by its
movability (7). Thus, the term property, used in this study without further specification,
can either refer to real property or to personal property. i.e. building with land

The valuation figure may not be the same as the price actually achieved. This may be
due to imperfections within the property market or the presence of a special purchaser to
whom the property may have a value over and above its worth to other potential buyers
or it may reflect a timing discrepancy. In reality, the length of time it takes for the
marketing of a property investment and agreement of a price can be several months,
during which time market movement may occur that places the agreed price out of line
with the then prevailing market values. Another problem that can lead to differences
between the valuation and the price achieved may relate to the lack of current
comparable evidence on yields and rents upon which to base the valuation. Price is
derived from the interaction of supply and demand, but the supply of property for
specific uses is relatively fixed and is slow to adjust to changes in demand, leading to
price anomalies (3).

Generally the word value may be viewed as a general, all-encompassing term that
incorporates the three main types of value: price, market value and worth. Price is the
actual observable exchange amount paid for a particular property, whereas market value

7
is an estimation of the most likely price achievable if the property were to be sold in the
open market (3).

It is important to bear in mind that the price paid for goods or services by an individual
with particular motivations or special interests „may or may not have any relation to the
value which might be ascribed to the goods or services by others. Any observed price
from a comparable sale is not indicative of market value since prices from particular
transactions depend on the negotiating strengths of the buyer and seller as well as on
their perceptions of worth (19).

Worth on the other hand, can be defined as the value of the property to a particular
investor, or class of investors, for identified investment objectives. In this context an
investor includes an owner occupier. Or expressed in other words, worth is the
maximum/minimum capital sum an individual would be prepared to pay/accept for an
asset (3).

As international valuation standard-2017, value can be defined in the following bases.

Market value- the estimated amount for which an asset or liability should exchange on
the valuation date between a willing buyer and a willing seller in an arm‟s length
transaction, after proper marketing and where the parties had each acted knowledgeably,
prudently and without compulsion.

Market rent- is the estimated amount for which an interest in real property should be
leased on the valuation date between a willing lessor and a willing lessee on appropriate
lease terms in an arm‟s length transaction, after proper marketing and where the parties
had each acted knowledgeably, prudently and without compulsion.

Equitable Value- is the estimated price for the transfer of an asset or liability between
identified knowledgeable and willing parties that reflects the respective interests of
those parties.

Investment Value/Worth- is the value of an asset to a particular owner or prospective

owner for individual investment or operational objectives.

Synergistic Value- is the result of a combination of two or more assets or interests

where the combined value is more than the sum of the separate values.
8
Liquidation Value- is the amount that would be realized when an asset or groups of
assets are sold on a piecemeal basis.

As International Financial Reporting Standards value can be Fair Value. It is the price
that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Additionally
Organization for Economic Co-operation and Development defines value as fair market
value; it is the price a willing buyer would pay a willing seller in a transaction on the
open market.

2.3 Major Determining Elements of Value

As David Isaac (2002), there are various elements that determine property values. The
international situation can affect levels of confidence in the market; the mood of the
national economy affects the confidence of investors. The levels of disposable income
available affect house prices and the amount available for investment. Government
policies affect property values. Property is taxed both in terms of capital gains and the
income derived from rents. Changes in the tax situation can affect the investor‟s interest
and Also government legislation can encourage or discourage investment directly or
through its fiscal (tax) and monetary (adjustment of interest rates) policy.

Additionally the local economy can affect land prices. Land prices and rents will tend to
be higher in areas where the local economy is thriving. Geography and location are also
important for value. Fashion and local demand can affect price. Trendy areas and
locations can increase price levels, as can the gentrification of traditional working class
areas. The individual design features of properties can affect value. These may include
architectural details, the space and design, the scale and nature of the garden, and the
age and style of the property (17)

Tenure can also affect the property price; a property may be freehold or leasehold.
Condition and state of repair will affect value, as will the availability of services. The
services include the provision of central heating in a house and the installation of air
conditioning or computer wiring/trunking in an office building.

Finally the ease of purchase and sale, that is the ease of transferability, will also affect
the property price. Prices will be depressed if the transaction takes a long time to

9
complete. Property investors are often paying interest on monies used for purchase.
Lack of information can also affect property prices. Because of the nature of the
investment, people will not generally buy a property investment unless they have full
details of the investment (17).Summary of factors that affect the value of property

Condition for
repair

Tenure
Potential for
development
Governm International
ent policy economic
situation
National economy
Design
features
Local
Local economy fashion/de Location and
mand demography

Figure 2-1: Factors that affect value of property

(Source: property valuation principles by David Isaac, university of Greenwich first

edition in 2002.)

2.4 Property Valuation

Property valuation is the heart of all economic activity. Everything we do as individual

or as groups of individuals in business or as members of society is influenced by the
concept of value. A sound working knowledge of the principles and procedures of
valuation is essential in all sorts of decisions relating to building buying, selling,
financing, developing, managing, owning, leasing, trading, and in the ever-more-
important matters involving income tax considerations (27)

Property valuation is the process of forming an opinion of value-in-exchange under

certain assumptions. Supply and demand within the property market as a whole and in
specific sub-markets will be changing all the time and therefore a valuation is a

10
snapshot estimate of exchange price at a particular moment. Because people tend to buy
and use property for a variety of utility and investment reasons, most decisions are made
after an assessment of their financial implications (31).

Property valuation is called just compensation. Hence, just compensation has also been
sometimes defined as “the fair market value of the property as of the date of the taking,
determined by what a willing buyer and a willing seller would agree to, neither being
under any compulsion to act”. The value of real property rights is the function of the
property‟s physical, locational, and legal characteristics. The physical characteristics
include the age, size, design and construction quality of the structure, as well as the size,
shape, and other natural features of the land. For residential property, the locational
characteristics include convenience and access to places of employment, Schools,
shopping, health center, and other places important to household‟s .The locational
characteristics of commercial properties may involve Visibility, access to customers,
suppliers, and employees, or other availability of reliable data and communications
infrastructure (30).

2.5 Property Valuer

A “valuer” is an individual, group of individuals or a firm who possesses the necessary

qualifications, ability and experience to execute a valuation in an objective, unbiased
and competent manner. In some jurisdictions, licensing is required before one can act as
a valuer. Because a valuation reviewer must also be a valuer, to assist with the legibility
of these standards, the term valuer includes valuation reviewers except where it is
expressly stated otherwise, or is clear from the context that valuation reviewers are
excluded (20).

The main task of valuer, by definition is to find the value of a property. To do this,
property valuer have to possess and be competent in a diverse range of skills, such as:

A knowledge of building construction

An awareness of environmental issues.
Research methods
Calculation
Measurement

11
 Report writing
Negotiation
Law
Management and business finance
A working knowledge of economics and politics

These are acquired and refined through a lengthy process of academic study, practical
experience and lifelong learning, also known as continuing professional development
(9).

There are three main reasons why valuers are employed because of their specialist
knowledge:

 The property market is an imperfect one – supply and demand are always
changing and are different in each location and for each type of property and
information on transactions is often restricted;
 Each individual property and the interests therein tend to be unique, or at least
never exactly the same as other properties;
 Legislation – the complex and inter-related laws relating to property are forever
changing, and only a specialist with full knowledge of them, which needs to be
constantly updated, can successfully interpret them correctly.

It is because qualified professional valuer makes an in-depth study of these matters, and
is fully informed of all factors affecting property values, that they can formulate a
reasonable and logical opinion on a value for a given property and situation.

According to Michael Blackledge 2009, the main tasks undertaken by valuer are:

 Receiving and confirming instructions;

 Inspecting the property and its location;
 Liaising with the client‟s other professional advisers where necessary, such as
accountants, lawyers and management consultants;
 Researching and analyzing all relevant information;
 Carrying out all calculations to arrive at a valuation;
 Reporting the results of the research and providing the valuation;

12
  Negotiating with the other party‟s representatives to reach agreement;
 Instructing solicitors on behalf of a client or employer;
 Providing property advisory and management services.

It need be pointed out that there had been incursions by other professionals into the
activity of property valuation. The Engineers, in the past had claimed to be the best
placed professionals to value plant and machinery. Not only that due to their familiarity
with factors related to real property, its method of construction and property
development with its market supply and demand data, proves that engineers are close to
give valuation service. Also, the Accountants and Bankers believe that the conventional
valuation methods are shrouded in mystery and indefensible (2).

Educational requirements for valuer are changing rapidly in Europe. Only recently
(1995/1996) postgraduate courses on real estate management have been introduced at
some universities. Most valuers have a degree in land-surveying (in Belgium valuer of
real-estate by tradition), architecture, engineering, economy, law, or brokering and have
become valuer by practice. Valuations of residential real estate are mostly performed by
smaller (often 1-person) firms, while commercial real estate valuations are mainly
carried out by larger companies (the major real estate agents, consultants, auditors, etc.)
who have specialized knowledge in their fields (13).

2.6 Purpose of Valuation

According to Peter Wyat-2013, Valuations are required for many purposes relating to
the development and subsequent occupation and ownership of property. The purpose for
which the valuation is required and the type of property that is to be valued will
determine the nature of the valuation instruction, including the techniques employed and
the basis on which value is to be estimated.

2.6.1 Valuation for Mortgage

Business dictionary defines the term mortgage as legal agreement that conveys
conditional right of ownership on an asset or property by owner (mortgager) to lender
(mortgagee) as security for loan.

13
Mortgage is legal term in which property is used as security for loan. The most common
sources of such loans are banks. A lender who is offering a loan facility which is to be
secured by a property will invariably require a valuation of the property to ensure that it
represents sufficient collateral. If a borrower defaults then the lender may wish to take
possession of the property and sell it in order to realize its value and thus recover the
debt. A lender who is lending money for property development will clearly wish to be
suitably reassured (with adequate allowance for the risk taken) as to the expected value
of the completed development (31).

Mortgaged property cannot be sold without repayment of the mortgage. When signing
the mortgage documents the borrower accepts a number of conditions, the most
fundamental of which is to repay the whole of the amount advanced (loaned) and all
subsequent or further advances and re-advances (24). A property valuation for mortgage
purposes is primarily an assessment of the market value of the property disregarding
certain factors such as furniture and fittings (not fixtures) that may be removed by the
mortgagor, goodwill and any speculative value, such as development value. The actual
sale price of the property should of course be its market value (9).

According to Peter Wyatt 2013, valuations of commercial property for secured lending
purposes will be conducted on the basis of market value or, in some cases, market value
with special assumptions. The valuation should also include comment on potential
demand for alternative uses. Examples of special assumptions include:

a) Planning consent has been granted for development;

b) There has been a physical change to the property such as new construction or
refurbishment;
c) There has been a new letting or settlement of rent review at a specific rent;
d) There is a special purchaser, which may include the borrower.
e) Marketing constraint is to be ignored;
f) Contamination or other environmental hazard is to be ignored.

According to David mackmin 2008, Michael blackledge2009, and other authors

principal types of mortgage are:

Standard repayment mortgage,

14
 The endowment mortgage
The interest only mortgage.
I. Repayment Mortgage

The repayment mortgage is the traditional way of borrowing money by way of a

mortgage. It requires the borrower to pay the lender a sum of money usually monthly,
which represents both interest on the money borrowed and a small capital repayment.
The amount payable will vary from time to time, as almost all mortgages allow lenders
to vary the rate of interest in line with movements in money market interest rates. With
a repayment mortgage, the borrower repays a level, constant sum each year made up of
the interest on the loan and a partial capital repayment. In the early years, the majority
of the annual repayments comprise interest on the outstanding debt, but in the latter
stages of the life of the mortgage, this reverses so that relatively larger portions of the
payments are repaying the capital. This is due to the reducing outstanding balance so
that interest is charged on a smaller amount of capital over time.

II. Endowment Mortgage

Endowment mortgages come in various forms, but the common feature of them all is
that they involve a lender, bank, and an insurance or assurance company. The borrower
enters into two contractual obligations to secure a mortgage in this way. The lender is
the provider of the capital in exchange for interest on the full amount of the loan at a
market variable rate for the full term of the loan. The assurance company provides a life
assurance policy on the life or lives of the borrower(s) at a premium based on the age of
the borrower(s) and their medical record. The policy provides for repayment of the loan
in the event of death and for the payment of a sum of money at the end of the term
estimated to be sufficient to repay the original loan at that date.

The most popular form was the low cost endowment mortgage. A low cost endowment
mortgage offered but did not guarantee that at the end of the term the policy will have
matured to a sum sufficient to pay off the loan and with luck leave a little extra for the
borrower. A non-profit endowment policy guarantees the policyholder a specified sum
of money at a specified future date. The conservative investment policy of most
assurance companies means that this form of investment will show a very poor rate of
return on moneys invested by way of premiums.

15
III. Interest only Mortgage

In interest-only mortgage, the amount of interest repaid each year remains constant
(providing the interest rate remains the same), calculated on the initial sum borrowed,
not on reducing balance, as is the case with a repayment mortgage. A very wide
selection of mortgage deals are usually presented to prospective home buyers by their
financial advisers which may involve early redemption charges and other financial
arrangements to suit the first time buyer or the buy to let borrower including equity
sharing arrangements. But the essence of a mortgage is that it is a loan which has to be
paid back sometime in one form or another and in respect of which interest will be
charged on the capital leant at a specified rate of interest.

2.6.2 Valuation for Compensation

Compensation is defined as “full indemnity or remuneration for the loss or damage

sustained by the owner of the property taken or injured for the public use.”
Compensation is commonly known as just compensation resulted from expropriation,
that the state reimburses the owner for the value of the property interest taken and place
the latter in as good a pecuniary position as if the property had been taken. The
assessment of compensation is extremely complicated, and different countries
incorporate different valuation methods within their expropriation legislation.
Nevertheless, the existence of compensation makes expropriation tolerable and
differentiates it from other government actions, such as confiscation, nationalization,
and eviction, in that these three are devoid of the state obligation to compensate for the
taking (30).

The principle of equivalence is crucial to determining compensation. Affected owners

and occupants shall be neither enriched nor impoverished as a result of the compulsory
acquisition. The term equivalence refers the affected people should receive
compensation that is no more or no less than the loss resulting from the compulsory
acquisition of their land. Appropriate measures should ensure that those affected, and
particularly the vulnerable, are not disadvantaged (3).

As Belachewu Yirsawu (2014) the term expropriation is used in its widest sense to
include all forms of taking of private property by a State for public use. It is the

16
compulsory acquisition of property. The owner of the property need not want to sell and
in fact, he does not sell his property is taken away from him by compulsion, and against
his will. The remedy available to him is compensation determined in accordance with
the statutes. The expropriator (usually the State) and expropriates (the affected people)
may come to an agreement with regards the amount of the compensation.

2.6.3 Valuation for Insurance Risk Assessment

Most properties are insured against damage and destruction and valuers are required to
estimate their replacement cost for insurance purposes. Strictly speaking this is less of
an estimate of market value in the sense of an exchange price and more an assessment
of the cost of a replacement building. Also, insurance companies must regularly revalue
property investment assets that they own to ensure that they are complying with
statutory solvency requirements and to encourage them to maintain a prudent spread of
investments in relation to their liabilities (31).

According to peter Wyatt 2013, insurance valuations is known as reinstatement

valuations and is undertaken on behalf of lenders, normally in conjunction with a
market valuation but are also undertaken for insurers and insurance brokers, property
owners and occupiers. A reinstatement valuation provides for a similar property as at
the date of the valuation or at the commencement of insurance policy cover and should
be carried out at least every three years. In the case of insurance valuations the site is
assumed to continue in existence despite whatever disaster may have affected the
buildings. Consequently, it does not include a valuation of the land. Furthermore, if the
insurance policy provides for a replacement „new‟ property (a „new-for-old‟ policy as it
is known) then no deduction should be made to reflect deterioration and obsolescence.

An insurance valuation in most instances is an estimate of the amount it would cost to

rebuild everything on the land if the existing buildings were totally destroyed. As such it
can be a figure which is the same as, greater than, or less than the market value. To
prevent confusion with a market valuation insurance value is sometimes referred to as
rebuilding cost or reinstatement cost. Owners of property can suffer losses in a number
of ways. The sensible owner and/or occupier will take all reasonable care to ensure that
such losses are minimized and that as far as possible they are compensated for such
losses through adequate insurance (24).

17
2.6.4 Valuation for Taxation

Valuations are also required for capital and revenue taxation purposes. Occupiers of
property must pay tax to the Government. The tax liability is calculated by assessing the
ratable value of the premises and multiplying this amount by a rate known as the
Uniform Business Rate. The ratable value of a property is very similar to its annual
rental value but with some simplifying assumptions. Valuers are also employed by
occupiers who wish to ensure the ratable value has been correctly assessed. Also,
valuations are required for property on which Capital Gains Tax and Inheritance Tax is
due (31).

Individuals receiving income or rent from residential property must declare that income
to the Inland Revenue. If an individual owns a number of properties then he or she may
be considered to be in business and the profits will be taxed accordingly. Income arising
from properties owned by a company will be subject to corporation tax. Residential
property can be taxed as inheritance and capital gain tax. When an individual passed
away, inheritance tax is payable if the total wealth of that individual his or her estate is
greater than the nil-rate inheritance tax band current at the date of death. A residential
valuer will be called upon, in all save the simplest cases, to provide a market valuation
of any residential properties owned as at the date of death.in other way residential
property capital gains tax is payable on gains arising from the disposal of assets.
Residential property is an asset for capital gains purposes, but one of the main
exemptions is the principal or main residence of an individual, including land held with
the residence as a garden. Up to one acre of garden is normally accepted, and more
where that would be appropriate (24).

2.6.5 Valuation for Development

According to international valuation standard (2017), development properties are

defined as interests where redevelopment is required to achieve the highest and best use,
or where improvements are either being contemplated or are in progress at the valuation
date and include:

(a) The construction of buildings,

(b) Previously undeveloped land which is being provided with infrastructure,

18
(c) The redevelopment of previously developed land,
(d) The improvement or alteration of existing buildings or structures,
(e) Land allocated for development in a statutory plan, and
(f) Land allocated for a higher value uses or higher density in a statutory plan

Developers need to know how much they should bid for a piece of development land or
a building that is in need of redevelopment. Land continues to be compulsorily acquired
for many public sector and utility network projects including major transport
infrastructure projects, urban public transport networks and airport construction, for
regeneration projects where sites in fragmented ownership need to be assembled, and
for minor works such as the realignment of a road junction to improve sight lines.
Compensation may also be paid to land-owners where none of their land has been
acquired but there has been a reduction in the value because of nearby public works,
such as noise from a new road (31).

Development valuation can be done for the following purpose (20)

a) When establishing whether proposed projects are financially feasible,

b) As part of general consulting and transactional support engagements for acquisition
and loan security,
c) For tax reporting purposes, development valuations are frequently needed for ad
valorem taxation analyses,
d) For litigation requiring valuation analysis in circumstances such as shareholder
disputes and damage calculations,
e) For financial reporting purposes, valuation of a development property is often
required in connection with accounting for business combinations, asset
acquisitions and sales, and impairment analysis, and
f) For other statutory or legal events that may require the valuation of development
property such as compulsory purchases.

2.6.6 Valuation for Financial Statements

Valuing for financial statement is commonly referred to as asset valuations; these relate
to the valuation of an entity‟s property assets for inclusion in financial statements such
as company accounts, stock exchange prospectuses and documents for takeovers and

19
mergers. If a property used for the purposes of the business has been adapted the valuer
should provide an estimate of existing use value in its post-adaptation state or in its
preadaptation state plus the depreciated replacement cost of the adaptation works (31).

As RICS 2012, for non-specialized owner occupied property value for financial
reporting can be existing use value and it can be defined as the estimated amount for
which a property should exchange on the date of valuation between a willing buyer and
a willing seller in an arm‟s-length transaction after proper marketing wherein the parties
had acted knowledgeably, prudently and without compulsion, assuming that the buyer is
granted vacant possession of all parts of the property required by the business, and
disregarding potential alternative uses and any other characteristics of the property that
would cause its Market Value to differ from that needed to replace the remaining
service potential at least cost.

Financial reporting valuations are performed using bases of value defined by

entities/organizations other than the IVSC bases of value and it is the valuer‟s
responsibility to understand and follow the regulation, case law, tax law and other
interpretive guidance related to those bases of value as of the valuation date and where
business entity adopts the fair value valuation option, valuations of property assets
should be undertaken on a market value basis (20).

A property owner who wishes to sell or transfer of ownership as output of financial

instrument would need to advertise an asking price that will attract potential purchasers
and the level is clearly dependent on market conditions. If the owner wishes to lease the
property then advice will be sought regarding the level of rent that could be obtained,
the lease terms that should be sought and the type of tenant that can be expected (31).

2.7 Approaches of Property Valuation

There are three internationally recognized methods of property valuation and they are
all based on the principle of comparison. The methods are sales comparison, income
capitalization and replacement cost. Using the sales comparison method the valuer
examines the sales of comparable properties and uses this market intelligence to help
estimate a value. Income capitalization considers the net income that a property might
generate, typically in the form of rent, and this income is capitalized using an
appropriate yield or by discounting the projected cash-flow at a suitable target rate of
20
return. Both the rent and yield will be estimated using comparable evidence. The
replacement cost method considers the possibility that, as a substitute for the purchase
of a given property, one could construct another property that is either a replica of the
original or could offer comparable utility (31). In practice the approach also involves an
estimate of depreciation for older or less functional properties where the estimated cost
of a new replacement is likely to exceed the price that would (hypothetically) be paid
for the subject property. Building costs, depreciation rates and land values are all
estimated by referring to comparable evidence (19).

As International valuation standard (2017), the goal in selecting valuation approaches

and methods for an asset is to find the most appropriate method under the particular
circumstances. No one method is suitable in every possible situation. The selection
process should consider, at a minimum:

I. The appropriate basis of value and premise(s) of value, determined by the terms
and purpose of the valuation assignment,
II. The respective strengths and weaknesses of the possible valuation approaches
and methods,
III. The appropriateness of each method in view of the nature of the asset, and the
approaches or methods used by participants in the relevant market, and
IV. The availability of reliable information needed to apply the method(s).

Valuers are not required to use more than one method for the valuation of an asset,
particularly when the valuer has a high degree of confidence in the accuracy and
reliability of a single method, given the facts and circumstances of the valuation
engagement. However, valuers should consider the use of multiple approaches and
methods and more than one valuation approach or method should be considered and
may be used to arrive at an indication of value, particularly when there are insufficient
factual or observable inputs for a single method to produce a reliable conclusion. Where
more than one approach and method is used, or even multiple methods within a single
approach, the conclusion of value based on those multiple approaches and/or methods
should be reasonable and the process of analyzing and reconciling the differing values
into a single conclusion, without averaging, should be described by the valuer in the
report (20).

21
2.7.1 Sales Comparison Method

The comparable sales approach simply requires searching for similar properties that
have been sold in the marketplace within a reasonable time period preceding the taking
date, and then adjusting the sales price of those comparable properties to reflect
differences between the comparable and the subject property (30). A property may be
valued by comparing it to similar properties for which recent price information is
available. Comparable properties are selected on the basis of their elements of
comparison which include the key transaction information such as the date, price paid,
market rent and yield, as well as the determinants of value such as size, location, use,
age, condition and tenure. Value-significant differences between each comparable and
the subject property must be reconciled before price information from the former
provide reliable evidence of the value of the latter. This reconciliation can be
undertaken qualitatively by the valuer, who would have experience and knowledge of
the local market, or a quantitative technique can be used to weight comparable
properties, isolate differences in the elements, quantify these differences and adjust the
values accordingly (31).

According to International valuation standard 2017, Appraisal institute (2001) and

Wyatt (2013), procedurally, the comparison method involves the following steps:

Collect evidence of transactions and eliminate those not conducted at arm‟s

length (between parent and subsidiary companies, for example).
Determine which transactions are suitable for adjustment having regard to their
comparability with the subject property. The geographic extent from which
comparable can be selected depends on the type of property and the state of the
market. Comparable yet to transact or beyond a suitable time-frame should be
used with caution.
Select the elements of comparison.
Compare the transactions on the basis of these elements, and make adjustments
where necessary.
Reconcile comparison elements to provide an indication of value for the subject
property (taking care to ensure that any adjustments made to the comparable
evidence reflect the likely reactions of market participants).

22
According to mackmin 2008, the following adjustment should be in valuation of
residential property by sales comparison methods.

1. Adjusting for Time Differences

Where a comparable property has been sold at an earlier date then it is possible with a
sound knowledge of the movement in market prices between sale date and valuation
date to adjust the known sale price by an appropriate and supportable percentage to
reflect the market movement. Such percentage adjustments can often be supported by
reference to published indices of house price movements. However it is always sensible
to discard historic prices for current prices, i.e. those achieved on sales within the
preceding month or so of a valuation date.

2. Adjusting for Differences in Location

Adjustments for differences in location may need to be made. In some areas exactly the
same house styles can be found in two or more distinct locations. The valuer will be
aware of buyer‟s preferences for each location and therefore an adjustment to prices in
area A might be possible to support an opinion of value in area B in the absence of sales
in area B. This might be a percentage adjustment or a lump sum adjustment. However,
as location is such an important factor in the market it is preferable to use comparables
from the immediate surrounding area. In practice it is not unknown for values for
similar properties to differ over a very short distance not by 5–10%, but by 50% or
more.

3. Adjusting for Condition and Accommodation

Comparable may need to be adjusted for differences in condition or accommodation. It

may be necessary to adjust for differences in plot size, for the number of bedrooms
and/or living rooms, for poor decoration etc. Precisely how much more a typical buyer
is prepared to pay for additional features or precisely how much less for poor decorative
order is very difficult to ascertain. At the top end of the market, poor condition can
render some properties unsalable at realistic prices; on the other hand a river view in
area may compensate for poor condition. If there is a serious physical defect then in
theory the valuer must determine by comparison the market value of the property in that
condition which may not be the same as the market value as if sound less the cost of

23
making good the defect. For example, a property suffering from subsidence will only
sell after the cause has been rectified and the property made good, or at the equivalent
discount on the normal market value.

4. Adjusting for Sale Conditions

Finally, it may be necessary to adjust the comparable for differences in sale conditions.
This is to take account of or preferably exclude any sales data arising from sales not
conducted at arms-length when the sale conditions were not normal market conditions.
It could have been a sale between members of the same family, a quick sale to a cash
buyer, a re-possession sale by a building society to recover mortgage debts, or a sale
forming part of a larger business deal. All such sales can be misleading. Misinformation
can very quickly lead to false valuations.

2.7.2 Investment Method/Income Capitalization Method

The investment method is used to value properties held as investments. The owner of an
investment property passes occupation rights to a tenant by way of a lease. The tenant
pays rent to the owner (landlord) and the level of rent is determined by the supply of
and demand for that type of property in the occupier market. To the landlord the rent
represents the income return on the investment so its ability to keep pace with or exceed
the rate of inflation is critical to its investment value. Mathematically the rent is simply
a cash-flow and therefore the investment value of the property may be determined by
calculating its capitalized present value (31).

Income capitalization is one of the recognized methods of determining a property's fair

market value taken by expropriation. It gives value to the land in relation to the income
it produces. The capitalization of income approach is generally used to value income
producing property when it is completely taken. It usually consists of arriving at an
independent value of the underlying land involved, and adding to it the value of
improvements, by converting reasonable or actual income at a reasonable rate of return
(capitalization rate) into an indication of value (30).

As Wyatt (2013), Capitalized value of any plot of land is the actuarial „discounted‟
value of all the net incomes which it is likely to afford, allowance being made on the
one hand for all incidental expenses, including those of collecting the rents, and on the

24
other for its mineral wealth, its capabilities of development for any kind of business, and
its advantages, material, social and esthetics, for the purposes of residence.

2.7.3 Replacement Cost Method

Some properties are regarded as specialized because their use requires them to be
constructed in a particular way, including highly production-specific manufacturing
plants such as chemical works and oil refineries; public administration facilities such as
prisons, schools and colleges, hospitals, town halls, art galleries and court facilities; and
transport infrastructure such as airports and railway buildings. Alternatively, the
property might be specialized by virtue of its size or location such as a large research
and development facility in a remote location ideal for a company‟s specific
requirement but with little or no demand in the open market. Valuations of the existing
use of specialized properties are required for financial reporting purposes, property
taxation, compulsory purchase and compensation. It is seldom possible to value
specialized properties using a sales comparison or income capitalization method
because they are rarely, if ever, sold or let in the open market except as part of a
business or entity. Instead a replacement cost method is used (31).

A cost approach is one of the three internationally recognized valuation approaches or

methods. The cost of construction is also the principal or main factor in residual
valuations and development appraisals, and the contractor‟s basis in rating. In the UK
its use is mainly confined to non-market situations, which is where there is no actual
market for the particular type of property, where the valuation is being performed in a
hypothetical market or where the market cannot provide reliable direct guidance. In the
USA, cost-based methods have been used for many years in parallel with market-based
methods, but disillusionment with this practice is now widespread and American
appraisers are moving towards limiting the use of cost methods to non-market
situations. It will be found in many developing countries where the property market is
opaque and undeveloped. DRC is not a basis of valuation but the method for arriving at
the depreciated replacement cost of a specialized property (15)

The replacement cost method values the expropriated property by determining the
replacement or reproduction cost of improvements, less depreciation, plus the market
value of the land. Hence, this predominantly serves to value buildings as well as

25
utilities, but not the land itself. It is especially considered one of the better methods for
determining a utility's fair market value, it is assumed that landowners may be
compensated fully by other approaches, especially where the property is not shown to
be both unique in nature and location and also indispensable to the conduct of the
landowners' business operations on the site from which a part is taken. So, mostly,
buildings of a unique character are valued using this method (30).

Traditionally it was considered that the cost approach should only be used when value
cannot be arrived at by any of the other valuation methods. As such, it was considered
the least reliable and accurate. However, this is not necessarily true nowadays. In
relation to rating valuation, it has been stated that: Whilst in the past the Contractor‟s
Basis has been criticized and referred to as a method of last resort, it has been refined
over the years through a number of Lands Tribunal (and higher) appeals and is now an
acceptable method to be employed in the valuation of certain classes of hereditament, in
particular in the larger industrial field, for example, oil refineries and steelworks, and
also public buildings, universities is found by calculating the current cost of
constructing the property, less allowances for age and obsolescence and/or over-
ornamentation or excess detailing, to allow for the fact it is not a new building, plus the
site value. Assuming that the property is vacant and to let, the hypothetical rent at which
it will let is found by taking a percentage of the capital value (9).

According to peter Wyatt 2013, cost method can be stated as follows:

Replacement cost of improvements-Depreciation allowance due to age and / or

obsolescence= Current cost of existing improvements + Value of land= Value of
property

2.8 Accuracy of Valuation

According to ISO 5725-1, Accuracy is general term used to describe closeness of

measurement result to true value. It involves components of random error and
components of systematic error. In this case trueness is closeness of mean of set of
measurement results to actual true value.

The property valuation profession must be guided by mandatory valuation standards,

practical knowledge and detailed guidance notes to give valuation service. Even though,

26
by having those guides valuations of the same property conducted by different valuer
will not always are the same and the valuation may not necessarily equate to the agreed
exchange price. The disparity in valuations of the same property is referred to as
valuation variance and the discrepancy between a valuation figure and the exchange
price is referred to as valuation inaccuracy. The valuation variance and accuracy leads
to valuation uncertainty. Valuation uncertainty is a recently coined phrase used to
acknowledge the fact that valuation variance and valuation inaccuracy are inevitable
consequences of the valuation process and recent research has attempted to quantify the
degree of uncertainty that surrounds valuation (31).

A valuation is a professional opinion on value formulated on the basis of the

assumptions adopted. An important issue here is the degree of accuracy that a given
valuation reflects the market realities as well as the features and potential of the
property, or that it corresponds to the price that would be obtained on the day of
valuation in an arm‟s length transaction. Uncertainty of valuation may be regarded not
only as accuracy concerning a single valuation, but also as the difference between
multiple valuations of the same property conducted at the same time and for the same
purpose (16).

The valuer‟s role in general is to advise as to what would be the best figure obtainable
for given property, in the open market, at a specific date. To do this, the valuer must
know how many and varied characteristics of real property can affect value and how
changes in social, economic and political factors, in the local, national and international
contexts, are likely to influence it. Legislation will have a major impact on assessment
of value and the valuer must have a good working knowledge of the relevant law to be
able to undertake the required valuations correctly (9).

According to peter Wyatt (2013), A longitudinal study of the accuracy of valuations is

conducted by RICS, and overall average price-value difference was 9.5% and 79% of
valuations were within 15% of sale prices. Valuer consistently under-value and there
may be several explanations for this: the market value assumptions preclude bids by
special purchasers, vendors may selectively dispose of properties when bids are
received above the valuation figure, vendors actively „present „properties for sale to

27
enhance bids, the growth assumptions used in the analysis may not pick up rapid market
movements, or valuer may be inherently conservative and backward-looking.

According to AJIBOLA,(2010), questions about valuation accuracy was triggered of by

the work of Hager and Lord (1985) when a small sample survey was conducted on ten
Surveyors who were invited to value two properties and in one case a range of valuation
was +10.6% and in the other was +18.5% suggesting a relatively low level of valuation
accuracy. In 1990, Drivers Jonas and IPD updated and extended the study, including
2,384 transactions and assessing results year by year between 1982 and 1988. Over this
period, the number of valuations falling within +10% of the sale price was 30%. The
number of valuations falling within + 20% was 67% therefore 33% or one-third of
Valuations fell outside the 20% bracket. Since 1992, the proportion of valuations within
20% of the sale price has increased to 80%. Those studies also suggested that valuations
are higher than sale prices when the market is falling and lower than selling prices when
the market is rising. Over/undervaluation could pose serious economic problem
especially when mortgage transaction is involved. This may discourage lenders from
advancing loans on real estate and the resultant effect is under development in real
estate market which will in turn affect economic growth.

2.9 International Practices and Evidences on Property Valuation

The International Valuation Standard (IVS) is recognized as the key international

valuation standard that applies in many countries and often acts as the basis or
foundation for all appraisal activity. Additionally various international laws and
standards reflect the concern for protection of property rights and the payment of
compensation when people are displaced and or expropriated. The right to own property
is recognized as a fundamental right of the individual under international law (3). The
following countries experiences are listed below.

United State (US)

The main bases of value referred to in the USPAP standards are as follows:

Market value
Investment value
Liquidation/forced sale value

28
 Fair value.

However, USPAP does not provide a market value definition but instead directs the
appraiser to determine the applicable definition. Market value remains the most
common basis used in appraisal reports. Some clients, such as banks, also ask for
liquidation or forced sale value or insurable value Appraisal Methodology utilized in US
Reports.

USPAP provides the mechanism to perform quality control and regulation of appraisers
but it does not prescribe the actual methods that should be used in the appraisal. Instead
it places the emphasis on ensuring the most appropriate methods are chosen and that the
decision to choose that method is fully explained in the appraisal report. USPAP
previously advocated the use of all three main valuation methods namely sales
comparison, income and cost. However, this has since evolved to recognize that the
appraiser should exercise professional judgment in deciding which methods are
considered, based on their relevance to the property type being appraised. For example,
a major office building will be driven by the income approach and the sales comparison
approach will often be included to provide a second check on value, but it would rarely
include a cost approach unless specifically asked for. Hence, the decision to exclude one
or more method should be explained in the appraisal report. Appraisers therefore
usually Comment on all three approaches and then justify the approach adopted or
reconcile the value conclusions based on the values determined.

Additionally for public property valuators the US constitution requires “just

compensation” for all takings of private property. National state should make payment
in a currency that can be readily used, that it should reflect the full value of the
expropriated property, perhaps incorporate an element for future lost profits, and that it
must be handed over within reasonable time after the expropriation, otherwise interest
should be paid. Developing countries have objected this formula, for it requires them to
pay out substantial capital sums for every expropriation (29)

29
United Kingdom (UK)

UK valuation methodology although not prescribed or detailed within the Red Book is
well established and market driven in terms of utilizing the market comparative
approach.

The five main UK approaches to value include -

Comparable method - for properties with a number of similar transactions

Income/investment method - for income producing properties such as offices or
shops
Accounts/profit method - for specialized trading properties
Residual/development method - for land with development potential
Contractors/cost method - for properties not normally bought and sold on the
open market.

It remains the knowledge and skill of the valuer to select and apply the most appropriate
methodology for the property being valued. However, the valuers‟ job should be to
replicate the market approach, in terms of whatever methods are used in practice to best
meet the client‟s terms of engagement. In this regard UK valuers felt there was no need
to prescribe methods within the standards as the most important aspect of valuation is to
replicate what properties are being transacted at in the market and that the prescription
of a particular approach seldom equals market value. There was also a feeling from
valuer that this can lead to miss valuing either in terms of incorrect inputs into software
driven models or through valuers failing to grasp the fundamentals that underpin the
valuation in the first place(28).

In UK, for government valuators in addition to the full compensation of the land
acquired, the expropriating organ is obliged to pay also “compensation for disturbance
of interest and compensation for severance and injurious affection. “Severance occurs
when the physical taking of the part of a parcel of land depreciates the value of the
remaining land. And injurious affection applies to the depreciation in the value of the
remaining land caused by the construction of and use of the works for which the part
was taken. Hence, to put the owner of the expropriated property in the same economic
position, these laws consider, during the course of valuation, the loss of the property

30
owner. Whether the expropriating organ has got much or little benefit from the taking
does not matter (30).

China

Appraisers from a construction background mostly undertook appraisals and therefore

they had limited knowledge of market practice and relied on the cost approach. To
change this, the Ministry established the real estate code which requires the „technical
side of valuation‟ to form part of the appraisal process.

The real estate appraisal approaches specified in the CIREA standard include:

Market comparison approach

Cost approach
Income approach
Hypothetical development method (residual).
Benchmark land price calculation (land datum price method).

The real estate appraisal code requires that appraisers should use at least two or more
approaches to appraising the value of real estate. Where figures vary widely amongst
the different methods, the appraiser should base the value on his/her expertise and
knowledge of the market, providing a rationale and reasoning for the value differences
(28).

For government valuations the People‟s Republic of China Constitution, 2004,

Amendment 10, mandates that any expropriation or requisition of land must be “for the
needs of public interests.” According to the Land Management Law (LML), 1998, Art.2
of China, the State may, in the public interest, lawfully requisition land owned by
collectives. Moreover, the People‟s Republic of China existing legal frame work
governing land expropriation further requires that all non-agricultural use of land must
use state-owned land (LML, 1998, Art.43). Where the land is owned by a rural
collective, it must first undergo a process through which the state expropriates the land
and becomes the owner. In such cases, the intended land user must apply to the state for
approval of the use and conversion of agricultural land for nonagricultural purposes.
Upon approval, the state will exercise its eminent domain power through the county-
level government (Art. 46). Under such a land-taking framework, the state may take

31
farmers‟ land not only for “public interests,” but also for all other purposes nonpublic in
nature.

According to the Urban Structure Demolition Regulation No. 2001, Article 23, the
amount of cash compensation in China, is determined by a market appraisal of the
condemned structure based on location, use, and floor space of the structure. The
method of appraisal should be the comparable sales approach, except in areas where
housing markets are not developed (ibid, Art.24). As to in-kind compensation, the
property owner is entitled to a replacement structure plus or minus any difference
between the value of the replacement structure and the assessed market value of the
condemned structure. In addition, the property owner is entitled to moving expenses and
transitional resettlement subsidy (30).

Brazil

The Brazilian standards Associagao Brasileira de Normas Tecnicas (ABNT) have five
different bases of value namely:

Market value
Value at risk - insurance value
Asset value
Forced liquidation value
Economic value - PV of income associated with an enterprise (investment
value).

Additionally for public property valuators the Brazil constitution requires “just
compensation” for all takings of private property. Market value remains the most
commonly used valuation basis but the majority of banks also ask for a forced
liquidation value. This liquidation value is normally calculated based on a percentage of
the market value (typically 70-80%) or based on a DCF calculation. The DCF
calculation takes into account how long the property is likely to take to be absorbed
back into the market alongside the associated costs to hold it for that period of time.
There is no reference to fair value in the standards, despite Brazil having adopted the
International Financial Reporting Standards in 2010.

32
Brazil is famed for having a regimented and technical methodology, the working of
which is detailed within their local valuation standards. The choice of methodology
remains at the discretion of the valuer but depends on the nature of the valuation, the
purpose of the assessment and the market data available. The methodology to be used is
not prescribed in terms of what approach must be used, but rather the standards set the
specific parameters that must be adhered to in applying a particular valuation method.
Wherever possible the standards prescribe the use of the comparative method using
direct market data with associated factor adjustments. These adjustments are detailed in
tables within the standards for the valuer to follow, but effectively making a large
number of comparables homogeneous rather than identifying those that are most similar
to the subject property. It is therefore common for valuers to utilize linear regression
modeling software with numerous comparables and detailed factor adjustments when
determining market value (28)

South Africa

In South Africa property valuation is governed by the South African Council for the
Property Valuers Profession (SACPVP). The SACPVP is a statutory body first
established on January 1st, 1983 as the South African Council for Property Valuers. It
became the South African Council for the Property Valuers Profession when section 2
of the Property Valuers Profession Act came into effect in the year 2000. SACPVP sees
itself in partnership with the State and the valuer‟s profession to promote a high level of
education and training of practitioners in the Property Valuers Profession to facilitate
full recognition, professionalism and effectiveness among valuers, both locally and
abroad. It enjoys full autonomy - although it is accountable to the State, the profession
and the public for the fair and transparent administration of its business in the pursuit of
its goals. SACPVP has just adopted the International Valuation Standards for
compilation of valuation reports (23).

According to Belachewu Yirsawu (2014), government valuators of South Africa, South

Africa constitutional law of Section 25 (2b) sets out the requirements that compensation
is due upon expropriation. Section 25(3) of the same constitution stipulates that the
compensation for expropriated property must be “just and equitable” in its amount, time
and manner of payment. Ordinarily, according to foreign property rights jurisprudence,
“just and equitable” compensation would mean market value compensation. It is also
33
indicated that compensation below market value or, conceivably, above market value,
may in some circumstances be just and equitable and therefore constitutional. Article
25(3) requires a balancing test between the public interest and the interests of those
affected by the expropriation when calculating the amount of recompenses for
expropriation and thereby requires that account be taken of “all relevant factors”
includes:

The current use of the property;

The history of the acquisition and use of the property;
The market value of the property;
The extent of direct state investment and subsidy in the acquisition and
beneficial improvement of the property; and
The purpose of the expropriation.

2.10 Banking History and Its Property Valuation Practice in Ethiopia

Modern banking in Ethiopia started in 1905 with the establishment of Abyssinian Bank,
which was based on a fifty-year agreement with the Anglo-Egyptian National Bank. In
1908 a new development bank (called Societe Nationale d‟Ethiope Pour le
Development de l‟Agriculture et du Commerce) and two other foreign banks (Banque
de l‟Indochine and the Compagnie de l‟Afrique Orientale) were also established
(zenebe, 2017).These banks were criticized for being wholly foreign owned. In 1931, it
was liquidated and replaced by the Bank of Ethiopia which was the bank of issue until
the Italian invasion of 1936. During the Italian occupation, Bank of Italy banknotes
formed the legal tender. Under the subsequent British occupation, Ethiopia was briefly a
part of the East Africa Currency Board.

During the five-years of Italian occupation (1936-41) banking activity expanded. The
Italian banks were particularly active. After independence from Italy‟s brief occupation,
where the role of Britain was paramount owing to its strategic planning during the
Second World War, Barclays Bank was established and it remained in business in
Ethiopia between 1941 and 1943(32). Following this, in 1943 the Ethiopian government
has established its own bank called State Bank of Ethiopia, which was serving both the
commercial bank and central bank activities. Later on, it is further dissolved into
today„s National Bank of Ethiopia (NBE) and Commercial Bank of Ethiopia (CBE).

34
EBA (2014) also states that, before the Derg regime (1974 through1991), there were
private and state-owned banks operating in the country such as CBE, Agricultural and
Industrial Bank (AIDB), renamed recently as the Development Bank of Ethiopia (DBE),
and Housing and Saving Bank (HSB)), renamed as the Construction and Business Bank
(CBB). By then, all financial institutions including banks were nationalized. Following
the regime change in 1991 and the liberalization policy in 1992, these financial
institutions were reorganized to work to a market- oriented policy framework.
Moreover, Proclamation No. 84/1994 that allowed the private sector to engage in the
banking business marked the beginning of a new era in Ethiopian banking. Following
this proclamation Ethiopia witnessed a rise of domestic private banks. According to
national bank of Ethiopia, two governments and seventeen privately owned banks are
working in the country (32).

Valuation methodologies employed by almost all Banks is similar, except the figurative
elements and some minor differences inherent in each. Many of the procedures employ
the cost approach in one way or the other, though not strictly in the manner prescribed
by the generally Accepted Valuation Procedures (12).

According to Ethiopian banker‟s association report 2014, methods used by banks are
cost method of valuation. In actual practice banks prepare valuation in order to ascertain
the firm that it may not advance money more than the value of the property. Also, to
keep a sufficient margin between the value of the property and the loan so as to cover
the loss of value due to depreciation and interest charges on the loan. Hence, banks tend
to minimize the level of risk that they are taking. So, they want to value a property by a
method that doesn‟t increase the valuation result. Cost method of valuation is likely to
result lower figure than a profit method. Therefore, cost methods are to the advantage of
the banks, so that they rely using these methods.

According to commercial bank of Ethiopia manual 2016, and an interview with

collateral valuator of private banks due to absence of comparative availability of data,
valuation for collateral purpose is done based on the replacement cost method.

35
Regulatory Framework on Banks

The banking sector in Ethiopia is regulated by the central bank, the National Bank of
Ethiopia, with the aim of ensuring the health of the financial sector and improving the
efficiency of service provision. The Licensing of Banking and Supervision of Banks and
Insurance Companies Proclamation (No. 84/1994) empowered the Central Bank to
supervise financial institutions. The proclamation, however, seemed to have limiting
conditions with regard to entry which can be considered as the main contributor to the
concentration of the banking services among a few banks.

The Ethiopian banking industry is appropriate for the investigations of regulations and
bank performance relationship as the industry is tightly regulated where entry of even
new private local banks is not easy following regulatory measures enforcing barriers to
entry. Most importantly the National Bank‟s attempt to guide on bank‟s activities
through both structural and prudential (reserve, capital, interest rate etc.) regulations
sometimes is not favorably accepted by banks. A case in point is the requirement from
the NBE for private banks to allocate a portion of their lending on government bills(23).

According to Lelissa and Kuhil, 2018, With regard to lending rate and other Banks
internal strategy was decontrolled and left to be determined by the banks themselves as
late as January 1998 as compared to October 1992 when the bias between public and
private charging of deposit rate was abolished. In all the reform period, positive lending
interest rate was recorded except in 2002/03 which was markedly known as severe
draught year. Furthermore, in most of the years during the period 2006/07-2010/11,
where the country was in hyper inflationary situation, the real lending rate appears
negative.

To conclude:

Based on various real property valuation standards and studies there are three
recognized methods to estimate value of property. From those methods sales
comparison methods and income methods can reflect market value of properties when
the available sales data, properties determinant factors and other relevant data for
property is available. Cost approach as property valuation approach is used for
properties when marketability of property is difficult and in absence of detail market

36
data .Cost method equates value of property with current cost to obtain similar property
less cumulative depreciation with some amount of adjustment to current market. So that
in Ethiopian banks due to absence of centralized comparative transaction data‟s
replacement cost approach is used.

The various studies carried out in UK, USA and Australia showed that acceptable range
of valuation inaccuracy fall between +5% and +10% for UK and USA while Australia
has +10% and +15%.In Ethiopia there are no registered and well developed central data
bank, but some papers conducted on compensation payment argues that properties are
undervalued, clients are also complaining that their property is under valuated by the
valuation firms and they feel that their asset can be sold off in excess than valuation
result.so that these paper assess and calculate numerical accuracy level of valuation
results conducted in Hawassa city.

2.11 Real property Valuation Approaches in Hawassa City

2.11.1 Introduction

There are banks giving financial services in the City. Major banks namely, Commercial
Bank of Ethiopia, Dashen Bank, Awash International Bank, Cooperative Bank of
Oromia, Lion International Bank, Nib International Bank, United Bank, Abyssinia
Bank, Birihan International Bank, Bunna Bank, Abay Bank, Addis International
Bank,Debub-Global Bank, Zemen Bank, Wegagen Bank, Development Bank and Enat
Bank.

Based on Hawassa City profile of 2016, the followings are list of Banks in Hawassa
city.

37
 Table 2-1 List of Banks in Hawassa City

R.no Name of Bank Location

1 Dashen bank (Hawassa Branch) Piazza, Alamura, Atote, Menharaia,
Arab sefer…etc. branches
2 Commercial Bank of Ethiopia (Hawassa Piazza, hayk, Atote, Menharaia,
Branch) Arab sefer, Alamura, Tula…..etc
branches
3 Zemen bank Atote, Piazza branches
4 Development Bank of Ethiopia In front of medianialem church way
to hayk entrance
5 Nib international bank Piazza, Menharaia, Arab safer.
6 Lion international Bank S.C Piazza
7 Wegagen Bank S.C
Atote, Menharaia and Piazza
branch
8 Abyssinia Bank S.C Piazza, Atote, Arab sefer,
Menharaia branches
9 United Bank S.C In front of Pinna, atote, Menharaia
10 Awash Bank S.C Piazza, Menharaia, Atote branches
11 Abay Bank S.C Menharaia, Piazza, Atote
12 Cooperative bank of oromia S.C South star, Alliance, Atote,
Menharaia, Arab sefer branches
13 Oromia international bank S.C Menharaia, Piazza, Arab sefer…etc
14 Birhan International Bank S.C Menharaia, Atote, Piazza
15 Aids international Bank S.C Arab sefer, Menharaia, Piazza
branch
16 Nib Bank S.C Piazza, Warka(atote), Menharaia
17 Enat Bank Piazza, Menharaia and Atote

38
2.11.2 Assessment of Real property Valuation Approaches of Banks in Hawassa
City

The above listed banks are engaged in financial services in Hawassa City but only four
of them have real property valuation department in Hawassa district level. The others
have no developed property valuation department at Hawassa district level and they
process any valuation based on their Addis Ababa head office based on manual
developed for Addis Ababa city.(source: interview from district managers). These four
banks are, Commercial bank of Ethiopia, Cooperative bank of Oromia, Awash
International Bank and Dashen Bank. Detail case study is done on those banks as well
as questionnaires and interviews are used to review other banks practice in Hawassa
city.

From my current review and valuated property Data from banks, that valuations
methodologies employed by almost all Banks is similar except the figurative elements
and some minor differences inherent in each. In the valuation methods used by many of
the Banks, the depreciated (or un-depreciated) replacement cost of development on the
premises to be held as collateral are calculated and multiplied with some sort of location
value to determine the estimated value of the property. For developments under
construction requesting project finance, most of the Banks employ an engineering cost
estimation using the specification in banks called construction grade and rate per
construction class of one sq. m floor area. The following are practices used by banks
which have real property valuation department at Hawassa district level

Awash International Bank

Awash bank is one of private bank engaged in real property valuation. Awash banks
property valuation purpose is categorized as collateral valuation for loan purpose and
forced selling. Awash bank valuates finished building as well as buildings under
construction for project financing purpose.

Steps followed for valuation-Awash bank

Instruction from client, to engineering and project appraisal team.

Then engineers request the client to come up with supportive documents like as
built drawings and lease agreement and project related documents

39
 The engineers make actual property visitation, determining property condition,
take actual measurements, list main building elements used in construction. In
data collection stage the engineer must include the following things:
A. Location of the property- Woreda, sub city, kebeles including house
number is registered; land mark of property, distance from main road, and type
of access road to property (Asphalt, paved or any road specification to the
property) must be described.
B. Analysis of neighborhood) - general use of building (commercial,
residential, office,…), marketability, standard of house, development state,
future tendency, transportation availability (available or not available), utilities
(available or not available).
C. Description of property
Number of houses in indicated properties is recorded. The type of building
materials in which building element constructed is recorded as material for
walls, roof, flooring, ceiling, doors and windows, lighting systems, fencing and
compound for determination of building grade and finally to decide rate per
sq.m floor.(described in table, below)
After having those field data and clients project documents, engineers calculate
the value of property as follows.

1. Deciding construction grade in each floor, the construction grade identification is

based on the following specification.

Table 2.2 Construction Class/Grade, Building Elements and its Material Details

Construction Building elements Construction material used

grade for R/C Roof Concrete, EGA, Decra or similar tiles
Wall Stone, Brick, HCB, Concrete
Cladding Stone, marble, brick, mineral paint
External wall paint Dressed stone, brick, mineral paint
Infernal wall finish Mineral paint, decorative paint, granite
Ceiling PVC, gypsum, timber
Grade 1A Staircase Marble, granite, quality timber
External door and Aluminum, quality timber
window

40
 Internal door Aluminum, quality timber
Floor Marble, parquet, ceramic
Excellent electrical fixtures, for residential it
Sanitary installation must include(steam, sauna and Jacuzzi)

Best quality fixtures, Cristal chanceller,spot

Electrical installation lights
Workmanship Excellent with ability to build luxury
architectural design
*grade 1 construction is almost similar with 1A,exect the followings
External wall and Quartz paint is added to 1A,external wall
Grade-1 internal wall material and internal wall
Sanitary installation For residential at least two of above listed
fixtures in 1 A
Workmanship Very good
Roof Concrete,EGA,CIS
Wall Stone,Brick,HCB,Concrete
Internal wall Dressed stone,brick,mineral paint, quartz paint
External wall Mineral paint,decorative paint, granite, quartz
paint
Grade-2 Ceiling PVC,Gypsum,timber,armstrong
Stair Marble,granite,quality timber
External and internal Aluinuim,quality timber
door
Floor Marble,parquet,ceramic, granite
Sanitary Very Good fixtures, for residential must include
at least one of 1A
Electrical Very good quality
Workmanship good

Roof Concrete,EGA,CIS
Wall Stone,Brick,HCB,Concrete
Cladding Brick,stone,clinker

41
 External wall Dressed stone,brick,quartz paint
Internal wall Quartz, normal paint on gypsum
Ceiling PVC,Gypsum,Armstrong
Grade 3 Staircase Marble, Granite
External and internal Aluminum, Timber
wall
Floor Marble, good quality PVC,Ceramic
Sanitary Good quality sanitary fixtures
Electrical Good quality electrical fixtures
Workmanship Good
Roof CIS
Wall Brick, HCB, Concrete
Cladding Brick, stone or no cladding
External wall Dressed stone,brick,quartz paint
Grade 4 Internal wall Quartz or normal paint
Ceiling PVC, Gypsum
Staircase Marble, Granite
External and internal Aluminum, good quality wooden door, PVC
wall profiles
Floor Good quality PVC,Ceramic
Sanitary Bath tub, good quality sanitary fixture
Electrical Good quality electrical fixture
Workmanship Good
Roof CIS
Wall HCB and chika (mud)
Cladding Brick, no cladding
External wall Render and normal paint
Internal wall quartz, normal paint
Grade 5 Ceiling PVC, Chip wood
Staircase Ceramic, Terrazzo
External wall LTZ, Imitation
Internal wall Medium quality wooden door

42
 Floor Medium quality ceramic, PVC,Ceramic
Sanitary Bath tub, good quality sanitary fixture
Electrical Good quality electrical fixture
Workmanship Good
Grade 6 Roof CIS
Only for Wall HCB, Chika
residential Cladding No cladding
External wall Rendered, pointed plastered and painted
Internal wall Normal paint
Ceiling PVC, Chip wood, Abujede, hardboard
Staircase Ceramic, terrazzo, cement
External wall Metal
Internal wall Poor quality wooden door
Floor Fair quality PVC, ceramic, cement screed
Sanitary Normal sanitary fixture
Electrical Normal electrical fixture
Workmanship Fair

2. Calculating area of each floor

Floor/slab area is determined for each floor as neat external area in sq.m

3. Determine condition of building if it is on service stage/for financing of ongoing

construction this step is neglected. (New, moderate, old), if the building is moderate and
old, list defects and their amount in factor is deducted from value of building.i.e
professional judgment

4. Decide on the rate of one sq.m slab from step one for each floor of construction.

5. Value of property=floor area in sq.m * Rate per sq.m-average depreciation. The land
value and consultancy fee is not included in assessment.(source-Awash bank, Hawassa
district office valuation report and interviewee from Engineer Abera-bank property
valuator)

43
Commercial Bank of Ethiopia (As Per Manual of CBE)

As stated above, of the three commonly known valuation methods, the Commercial
Bank of Ethiopia (CBE) uses the replacement cost method. The process of completing
the cost approach analysis in CBE will involve carrying out tasks at various steps. The
first step in the cost approach is collecting relevant documents and carrying out property
survey. Once relevant documents are collected and physical survey of properties carried
out, the Cost Approach of CBE to value the subject property will follow the following
steps.

Step -1 Estimate the replacement cost new of all improvements to the land.

Step -2 Estimates the accrued depreciation for each improvement.

Step -3 Calculate replacement cost new less depreciation by deducting all accrued
depreciation from replacement cost new for each improvement. (Subtract step 2 from
step 1).
Step -4 Estimate the value of the land rights (locational value), using highest and best
use.
Step -5 Add all replacement cost new less accrued depreciation to the calculated land
value

This step will derive a value which is indicative of the Cost Approach to market value.

Estimation of replacement cost new:

In the estimation of replacement/construction costs of improvements, the following

steps will be followed:

Categorization of improvements
Building grading
Determination of superficial/plinth area or volume of the subject property
Determination of appropriate replacement cost rate
Determination of costs of other improvements, including: high cost items in/on
buildings, site developments and consultancy fees.

In computation of the subject property using the replacement cost approach, client
requested to submit bill of quantity but final governing valuation result is after having

44
total weights of building elements with its material and condition assessment the banks
developed excel system calculates value by plinth area method.CBE valuators uses two
estimation methods.

I. Bill of quantity method

Projects to be appraised for project financing will be estimated by employing the

engineering cost estimation method using the detailed bill of quantities method. During
estimation, the valuator shall undertake the following tasks:

Check the quantity against the presented document

Revise the unit price
Establish the finished project cost using the plinth area and volume method
Estimate the expected cost.

II. Plinth area/volume method

Replacement cost of buildings of completed construction at time of survey shall be

calculated based on plinth area/volume method. The procedure involves determination
of type and percentage of building components per each building type, reading of
corresponding factors from the manual, multiplying percentage of each building
component by its corresponding factor, summing up all the building factors and
plugging it in to the tabulated empirical formula to reach to the corresponding plinth
area rate. This procedure can also be used in project appraisals to check the overall
project cost of buildings against the bill of quantities method. It is also very helpful to
easily estimate the percentage of completion of buildings under construction.

Building condition factor (Depreciation)

The depreciated replacement cost of a structure is found by deducting the costs of wear
and tear (depreciation) from the replacement cost new. The resulting value is called the
Depreciated Replacement Cost (DRC). The deduction made for wear and tear, or
depreciation, depends on a number of factors. One is the age of a structure relative to its
expected usable life span, or service life. Another is the structure‟s existing condition.

For different parts of the property, different depreciation multipliers are applied in
determination of physical depreciation. These multipliers are applied for buildings

45
worth collateral. The minimum requirement set for a building to be held as collateral is
being structurally stable.

For different categories of building different depreciation multiplier factors are used.
The deduction factor shall be applied to the building components in the determination of
physical observation.(Appendix-8,building depreciation factor of CBE)

Location Value

The locational value of the subject property can be assessed based on the manual of the
bank. The steps in calculating the locational value are:

Determine the area of the property.

Determine the grade of the plot (plot grading). The grades are divided into four;
grades are given based on the properties distance from the nearest main road.
Determine the road width criterion: if the width of the feeder root is less than 6
meter or internal roads of width less than 4 meter, a five percent locational value
deduction factor will be considered.
Looking for the quality factor: based on site accessibility condition (stable
asphalt road, worn asphalt road, coble stone etc...), percentage factor will be
applied on the locational value.

The location value of a lease land is determined by deducting the unpaid lease amount
from the locational value calculated by parameters stated in the manual. The paid lease
amount will be taken, if the agreed lease value exceeds from the location value. But for
regional cities location value can be directly used from table in the manual. Location
value for Hawassa city is attached appendix-7

Cooperative Bank of Oromia and Dashen Bank

Two banks, Cooperative Bank of Oromia and Dashen Bank are Banks held by Share
Company, they have property valuation department in Hawassa and uses almost similar
procedure except some numerical differences. Two financial institutions have property
valuation department and valuates property under construction and property on
operation stage for loan security and for forced sell.

46
The following are steps taken to get property value:

1. Instruction from client for valuation

2. Collecting all relevant documents, visiting property, taking actual measurement

3. Giving weight for all building elements regarding to their material and
workmanship quality based on manual.

4. Adding up all weights of each building element to get total weight.

5. Checking construction grade from total weight range.

Table2. 3 Construction Grading and Range in Percentage of Building Elements

Building conditions Range on Summation of overall

weights (%)
Class one (Excellent condition) [ 83-100]
Class two ( building in very good condition) [67-83]
Class three (buildings in average condition) [50-67]
Class four (economical) [40-50]
Class five (buildings categorized as low [30-40]
quality)

6. Identify rate in birr per floor area in sq.m for all types of floor constructed per grade
of construction identified for each floor.

7. Calculate depreciation in percentage by collecting all defects.

8. Calculate replacement cost as neat constructed area*rate-depreciation

9. Determine location value

10. For Cooperative bank of oromia, calculate consultancy fee as 1.5% of project
construction cost.

Then property value as per COOP=location value + consultancy fee+floor area*rate per
sq.m-depreciation cost

For Dashen bank, property value=location value+replacement cost-depreciation

47
Conclusion

All banks in Hawassa City performing valuation practice uses replacement cost method.
The reason for using this method is that it is difficult to get stable market as well as
sales of similar property due to lack of centrally developed market data as well as non-
stable property markets in developing countries, so that the approach equates the
summation of all cost categories required to develop or construct similar building with
current market value of similar building. During cost determination and methods
applied to calculate final cost of building by banks of Hawassa City the following points
can be identified as gap that can cause high variation between buildings calculated cost
and market value of building in replacement cost approach.

1. Banks uses plinth area method: all banks rate determination is based on
constructed floor area. According to estimating and costing civil engineering projects,
six edition and estimating and tendering for construction works third edition by Martin
Brook , project management body of knowledge fourth edition of America national
standard, detail costing or estimation of building improvement or replacement cost by
BoQ method have high accuracy than other estimation methods. Even in this plinth area
method it is difficult to register different quality finishes used in one floor and also
partially finished stage have no weights as well as no cost in manuals and formats of
bank. So that such items are excluded from value of property for building valuation
under construction.

2. Banks one time fixed rate per floor area

All banks in city have developed rate per floor area for different grade of construction.
Markets for property constructed as well as material and input for construction is
changing with time. The market behaviors also depend on countries political, peace and
security as whole and towns and cities in particular. So that fixed rate per floor slab
cannot express property market volatile behavior. It‟s difficult to fix or control market
properties but companies can include some amount of factor multiplier for developed
rate for constructed floor.

48
3. Difference can arise from different methods

Cost approach equates cost for construction of similar property as market value for that
property. But commercial properties replacement cannot be equal with its market value
in arm‟s length transaction. E.g. the building at city center of Hawassa if it is
constructed in 1 million birr, its market value can be 10 million, thus the value of
income generating property value mainly depends on earning income and sellers and
buyers strength of negotiation on open market.

4. No accurate market evidence (data)

Market value related to land as well as property is not stable. Land can be obtained by
lease or by inheritance can change from time to time and even for private developers its
value may change in days. The same is true for construction materials and other inputs
for property valuation under construction. Thu instable market and no well documented
sales data including respective transactions results inaccuracy and variability. So
developing countries cities and town‟s property markets are not sufficiently active to
provide reliable information about prices. Markets do not provide reliable information
about the value of the real property.

5. Lack of well updated standard.

Banks standards and formats used for valuation calculation in Hawassa city can cause
variation variability. As seen in banks valuation format and manuals some banks have
format that considers value of land and others not consider land value by taking higher
value of floor area rate. Even those banks using location value their formats or standards
not fit with current urban expansion or current developed urban land grade. Almost all
banks exclude land value for Dato, Tula, diaspora…..and other newly developed city
due to outdated standards, but in reality current market location value as well as asset
appreciation in that newly emerging city is very high especially at diaspora areas.
Formats of private banks are not detail and specific it is general and not easy to
incorporate newly emerging construction qualities. Additionally some private banks
have no developed format for valuation of properties in Hawassa. That cumulative
effect can creates variation and inaccuracy of valuation results. Additionally the
following points can considered as gaps in valuation practices banks in Hawassa city
from document analysis.i.e.Lack of professional association, as well as capacity

49
buildings on training, Client pressure or influence, Lack of well updated standard,
Characteristics of firms using general practice rather than specialized scientific
procedure, Errors in survey, Valuators level of experience, Insufficient depth of
investigation, Errors in procedure, Lack of professional property valuer.

50
 3. RESEARCH METHODOLOGY

Methodology is the systematic, theoretical analysis of the methods applied to a field of

study. It comprises the theoretical analysis of the body of methods and principles
associated with a branch of knowledge. This research followed the steps in
chronological order for over all of the work of real property valuation approaches and
its accuracy in case of Hawassa City. It explores the way the research was designed, the
instruments that will be applied in the data collection and methods of analysis to be used
in research. Different sources of information and data investigation were used. Study is
conducted as taking case study on valuation of four commercial and two residential
buildings, questionnaires used to support cases, for officers who have no time to fill
questionnaires, questionnaire interview is used and normal scheduled interviewee is
used for real property owners. Discussions as to what, how and why these cases are
selected are dealt in detail.

3.1. Description of the Study Area

The study on assessment of real property valuation approaches and its accuracy is
conducted in Hawassa City. Currently the city is called as Hawassa by some peoples
and Awassa by others. Awassa, also called Hawassa, is city in Great Rift Valley of
southern Ethiopia. It lies at eastern edge of large Lake Hawassa, with its resident
hippos. Water birds gather around popular fish along lakeshore nearby western amora
gedel national park is inhibited by monkeys. To the North West senkele Swayne‟s
hartebeest sanctuary is home to these endangered African antelopes (11).

According to Hawassa city profile developed in 2016 by Hawassa City Administration

Finance and Economic Development, the City of Hawassa enjoys favorable climatic
conditions because of its geographic location on the shores of Lake Hawassa, The sky is
generally clear, fog is uncommon, the temperature is mild, and the moderate winds
often have a positive influence on the temperature. Rainfall mostly occurs in the
summer season. The daily minimum and maximum temperature values are always
moderate and only for the few days of the year when either the minimum temperature is
9.7 or maximum temperature is 30.91°C. The built-up area of Hawassa is divided into
industrial, residential, and commercial zones. The city is divided to in to 8 sub-city
administrations and 32 kebeles. The largest sub-city in terms of area is Hawella-Tulla.

51
Much of the population growth has been the result of internal migration and expansion
of educational and other facilities, also widening of the city‟s boundaries has caused
some of the increase. Hawassa has total population in 2006 is 343,175 from that
166,576, are females and 176,599 are males. Around 65% of the people are under 25
years of age, and only about 5.5% of the population is over 50 years of age.

Figure 3-1 Administrative Map of Hawassa City

(Source: Hawassa city Administration Finance and Economic Development in 2016.)

3.2 Research Design

As Kumar, (2005) research design is the arrangement of conditions for collecting and
analyzing of data in a manner that aims to combine relevance to the research purpose
with economy in procedure. Huff (2009) defines a research design as “A plan that
guides the investigator in the process of collecting, analyzing and interpreting
observations. In this research case study method is used and supported by
questionnaires and interviewee.
52
According to Belachewu Yirsawu a case study is defined as “An inquiry that
investigates a contemporary phenomenon within its real-life context, especially when
the boundaries between phenomenon and context are not clearly evident. The case study
inquiry copes with the technically distinctive situation in which there will be many more
variables of interest than data points, and as one result relies on multiple sources of
evidence, with data needing to converge in a triangulation fashion, and as another result
benefits from prior development of theoretical propositions to guide data collection and
analysis” (3).

A case study approach was considered appropriate in assessment of real property

valuation and its accuracy in Hawassa City. It allowed direct observation of the real
properties being studied and interviews of the persons involved in the property valuation
process. Through direct observation of properties valuated, as well as through
interviewing and questionnaires with property owners and valuers, it was possible to
evaluate the actual practice real property valuation approaches and its accuracy in
Hawassa City.

3.3 Selection of Cases

In this study, case study areas are selected based on non-probability or purposive
sampling of valuated buildings in Hawassa City. Non probabilistic sampling sometimes
called purposive, includes (at its most sophisticated) quota sampling and (at its least
sophisticated) what is sometimes called „opportunity‟ sampling: the simple expedient of
using as a sample whoever is available and willing. This type of sampling can be used
market research in which selected data source can be practiced for all other population
(21).Thus by using purposive sampling commonly called person to person sampling, the
case study data, such as land lease agreement, as built BoQ, as built drawings, recently
prepared property valuation data, payments made for consultants, payments made for
contractors, costs outlaid for lease…etc, data are collected. Total six valuated buildings
are selected as case study. i.e. four of them are commercial buildings and two are
residential building. These six buildings are valuated and appraised in fourth quarter of
2011 Ethiopian calendar, so that it is possible to assess their valuation approach by
using relevant data from bank valuation system and compare it with current market
value. i.e. their valuation dates are not far from current market so that difference
between current market assessment and banks valuation identified as valuation variation
53
and inaccuracy. Additionally questionnaire, questionnaire interviews and normal
scheduled interview is used to conclude case study and assessment to whole Hawassa
City valuation practice.

3.4 Data Sources and Collection Methods

According to Belachewu 2014, evidences for case studies may come from different
sources. Similarly, Yin (2003) says, case study approach in research is not restricted to
any specific data collection method. It allows for the use of a variety of methods
depending on the circumstances and the specific needs of the situation. It is for this
reason that several sources of data and methods of data collection are used in this
research.

3.4.1. Primary data

Primary data consists of collection of expenses or payments made by owners as well as

income generated by facility managers, market inflation, as built drawings, as built bill
of quantities, continuous site visits, taking actual site measurement for properties which
have no up dated as built documents, banks valuation report, banks valuation manuals
and formats, interview result of bank valuation officers, collection of recently approved
as built bill of quantities for valuated buildings, updated fourth quarter 2011 E.C unit
rate, structured and semi structured questionnaires that would be administered to all
categories of valuators in a specific valuation practice. The main practices will exercise
on banks and real property owners.

3.4.2 Secondary Data and Document Analysis

Secondary data in this paper include gathering and study on detailed literature review,
relevant documents and papers, legal concepts and provisions, valuation methods, and
matters related to financial sources and their influence on the determination of valuation
rate/amount. Documents were also gathered from various published journals, reports,
books, project reports, and related materials. In general, document sources are classified
in to three major categories: legal documents, academic literature, and documents
reflecting international practices. Legal documents including the Federal Constitutions,
proclamations and regulations related with building valuation approaches and its
accuracy. Academic literature, which reflects various research work and studies on

54
issues or problems related to real property valuation and related task, international
standards and other countries practice are categorized as international practices.

3.4.3 Sample Size and Sampling Method

The data gathering process goes two steps. The first was detail document collection for
case studies. They are as banks valuation formats, previously valuated properties, built
drawings, as built bill of quantities, currently developed unit rates from municipality,
land lease agreement from municipality, continuous site visiting and taking actual site
measurement for properties which have no well-developed documents. Second data
gathering process was questionnaires and questionnaire interviews from valuator who
have no time to fill questionnaires. The questionnaire was distributed for 39 property
valuators that are currently working in banks as real property valuator. From 39
valuators 10 valuators are currently working in Hawassa district banks property
valuation departments and the remaining 29 valuators are at Addis Ababa head office
level that performs property valuation process of Hawassa city branch when requested
from branch offices.

3.5 Methods of Data Analysis

Qualitative and Quantitative Methods

In this study both quantitative and qualitative data is used. The data from
questionnaires, questionnaire interview and normal scheduled interview is used to
assess the real property valuators perception in valuation practice, variation and
inaccuracy existence and problems or causes‟ of variation and real property owners
satisfaction on result of their property assessment and appraisal by bank. The collected
data from valuators and property owners is quantitatively analyzed by statistical
method. Data analysis output is in the form of simple descriptive statistical methods
such as averages, ratios, percentages ,standard deviation and standard error was
interpreted so as to establish the context of the meanings of the responses and their
implications to the study objectives and questions. The standard deviation (SD)
measures the amount of variability, or dispersion, for a subject set of data from the
mean, in other words, SD indicates how accurately the mean represents sample data,
while the standard error of the mean (SEM) measures how far the sample mean of the
data is likely to be far from the true population mean. The SEM is always smaller than

55
the SD. Standard error of mean is checked with data standard deviation to check
whether it holds data reality of SEM<SD. Mean square( ⃗ ) can be calculated
∑
by: ,

Where; f , xi is Measurement scales and fi is its frequencies.

∑
Standard deviation is calculated as SD=√ ,

Where; n=number of sample, xi=Measurement scale and f= frequency.

Standard error is measured as (SE) = , where SD is standard deviation and n is

√
sample size.

Lastly the problems that causes valuation variation or debate from current market value
is ranked based on its mean score value. Additionally, after having case study
documents stated above as per requirements of techniques developed from literature
review and banks practices the selected property valuation is assessed, the same
property is evaluated by other banks in Hawassa City and the best possible value that
property in current market is calculated based on detail replacement cost. Then the
difference of real property value of banks in Hawassa City and current market value of
property is compared to check percentage deviation of banks assessment scale with
current market value of property.

Finally, the respondents result from questionnaires and interview with detail case study
on six real properties, findings are summarized, the mean value of variation is
developed, problems that cause variation is identified and ranked and overall conclusion
is drawn with recommending possible directions that can cause improvement in real
property valuation and accuracy.

56
 4. ANALYSIS AND DISCUSSION

4.1 Survey Result

In this section, the main field survey results obtained from property valuators as well as
property owners are presented in brief. The findings are based mainly on data gathered
from respondents selected from real property owners and property valuers.
Questionnaires are administered on 39 property valuers that are currently working in
bank. Since some of the respondents were officers or coordinators and they have no
time to fill the questionnaire, the data collection was managed through questionnaire
interviews. Questionnaires are prepared in such way to check the bias of data, by cross
checking bank valuators response by interviewing those questionnaires to property
valuation officials at bank district level. Additionally detail information was gathered
from property owners and Hawassa city administration construction department‟s
officials by using detail interviewee on issues of current market and as built BOQ.

4.2 Analysis of Data from Questionnaires and Interviewee

Questionnaires are distributed to 39 valuators and 31 questionnaires are returned.

Table 4.1 Numbers of Questionnaires Distributed, Returned and Response Rate

Total number of Number of questionnaires Response Rate

questionnaires returned (%)
distributed.
39 31 79.49
Respondent‟s general profiles, Educational background

Table 4.2 Respondents Educational Qualification

Educational back number of % of

ground respondents respondents
Diploma 0 0
BSC Degree 24 77.41
Master‟s degree 7 22.59
PhD 0 0

Table-4.2 shows the educational qualification of real property valuers having different
expertise and employed in banks. From the total number of property valuers, 77%
percent are BSC degree holders and 23 percent are masters.

57
 Respondent rate
1
77.41%
0.8
0.6
0.4 22.59% % of respondents
0.2 0 0
0
Diploma BSC Degree masters Phd
degree

Figure 4-1 Chart showing educational qualification in percentages

Respondents relevant work experience

Table 4.3 Respondents relevant work experience

work experience number of % of

respondent respondent
s s
below 5 years 2 6.5
5-10 years 25 80.6
11-15 years 2 6.5
16-20years 0 0.0
21-25 years 1 3.2
above 25 years 1 3.2

working experiance Vs % of respondents

90
80
70
60
50
40
30
20 % of respondents
10
0

Figure 4-2 Chart Showing Percentage of Work Experience from Respondents

Figure 4.2, describes relevant work experience in real property valuation. .i.e., 7% is
below 5 year, 81% have 5-10 years‟ experience, 7% have 11-15 years of experience, 3%
have 21-25 years of experience and 3% have above 25 years of experience.

58
4.2.1 Assessment of Real Property valuation Approaches Used

Based on respondents background major valuators are degree holders with experience
from five to ten years is indication for problems identified problem of work experience
and ability in research and development. All banks engaged in real property valuation
use Replacement cost method. According to interview from four real property valuation
coordinators in banks of Hawassa city, they uses cost method of valuation, as their
response that cost Approach is used as depreciated and un depreciated replacement cost
for property under operation and under construction respectively. Response rate of
questionnaires also assures this reality. The respondents asked to select property
valuation approaches 31 respondents or 100% rate selected cost approach of property
valuation.

Purpose of Valuation

According to respondents, real property in Hawassa is valuated mainly for two

purposes. i.e. for Mortgage security and for forced selling purpose. Among purpose of
property valuation mortgage security and forced selling are identified with response rate
of 100%. Additionally, interview from valuators team leaders in four main district banks
confirmed that if the customer not able to pay his loan as per loan and collateral
agreement entered with bank, the bank goes to sell that property to recover amount of
money lent to customer by taking new valuation at a time to take forced sell action.
Thus the first objective of paper in assessment of real property valuation is addressed by
methods and purpose of valuation.

4.2.2 Comparison of Banks Valuation System with Detail Costing

Based on respondents on above table, banks in Hawassa city uses cost approach of
valuation. Also interviewee from banks valuation team coordinators assured that they
uses previously developed rate per sq.m floor and they have no trend of checking the
result with detail costs outlaid to construct that property even detail costing is final
detail indicator to replace real property.

Existence of Variation and Inaccuracy in Practice

Respondents are requested to indicate their professional opinion weather the valuated
result represents current market value of that property by giving measurement scales.

59
 Table 4.4 Respondents Result on Existence of Valuation Variance and Inaccuracy in
Practice in Banks of Hawassa City

5=Strongly Agree, 4=Agree, 3=Undecided, 2=Disagree and 1=Strongly Disagree Source:

Measurement scale 5 4 3 2 1 Mean score St error St. Deviation
Existence of variation 16 9 6 0 0 4.3225806 0.139772 0.7782154

Results from the study have shown that valuation variance and inaccuracy exist within
the Hawassa city banks valuation practice as shown by the respondents. 51.6% strongly
agreed and 29% agreed with this which represent 80.6% acceptance with a mean score
of 4.3225806 and a standard deviation of 0.7782154. Sample mean of data is at
0.0139772 far from population mean and standard deviation is greater than standard
error. i.e. 0.7782154>0.139772

Valuers‟ Opinion on Accuracy Acceptance Margin

Table 4.5 Valuer’s opinion on variance of valuation acceptance margin

Variables of accuracy +/- 5% +/-10% +/-15% +/- Above 20%

acceptable margins 20%
Frequency of accuracy 18 10 3 0 0
acceptance level
Percentage of 58.06 32.25 9.67 0 0
frequency

Sampled opinion from engineers working in banks of Hawassa city as real property
valuators shows that for valuation to be accepted as been accurate; the error margin
between valuation result and current market value should be between ±5% to ±10% as
indicated above by 58% and 32% of the respondents supporting this margin. Any
valuation falling beyond this range will not be reliable.

60
Customers Feeling on Valuation Results
Table 4.6 Level of Customer’s Satisfaction on Valuated Result of their Property by
Banks

Measurement scales. 1 = highly disatisfied,2 = disatisfied,3 =Indiffrent,4 =

satisfied,5= highly satisfied
property owners valuation Private property owners
perception on banks value 1 2 3 4 5
frequency 13 2 1 0 0
% of frequency 81.25 12.5 6.25

Source: compiled from field survey in 2019.

The real property owners, from them 16 are get loans from banks in Hawassa city in
fourth quarter of 2011 E.C, are interviewed to express their level of satisfaction on value
of their property estimated by banks. From interviewed bank customers regarding on
property valuation 81% are highly dissatisfied and 13% are dissatisfied. This shows that
the majority (94 percent) of the customers were not satisfied with the valuation result
offered from banks. Although it seems still there is debate of results from current
market value, so this should remain main issue that needs to be addressed by
participating banks and other concerned parties.

Finally banks non checking of valuation result with detail costing, valuators opinion
indicates the existence of valuation variance in practice but valuators respondent
indicates that margin of inaccuracy level should be +/-5 to +/-10% to acceptance margin
of valuation result, customers high dissatisfaction on valuation result addresses
comparisons of banks valuation with detail costing. i.e. specific objective-2 under study
is addressed.

4.2.3 Possible Causes of Valuation Variance and Inaccuracy of Banks in Hawassa

City

The following points are identified as gaps in valuation practices of banks in Hawassa
city from document analysis, Differences arising from using different methods, use of
plinth area method, use of rates developed at a time with no adjustment for changing
nature of property market, lack of political stability peace and security, Lack of updated

61
standads,No centralized market evidence(data),Lack of professional association as well
as capacity buildings on training, Client pressure or influence, Characteristics of firms
using general practice rather than specialized scientific procedure, Errors in survey,
Valuators level of experience, Insufficient depth of investigation, Errors in procedure,
Lack of professional property valuer. To identify valuators perception on possible cause
of valuation variance and inaccuracy for all banks in Hawassa city that engaged in real
property valuation services, structured questionnaires of 5-points scale (where
5=strongly agree,4=agree, 3=undecided, 2=disagree, and 1=strongly disagree) is used to
rank the response from respondents. According to respondents possible causes of
valuation variation and accuracy is identified and ranked in appendix 1.

Variation variables Vs Mean score

6
5
4
3
2
1
0 Mean score

Figure 4-3 Valuation Variance Variables with its Mean Score

In this finding regarding on valuers opinion sample size and study population is equal,
so that validity regarding on representation of sample size to study population is not
important. Small value of standard error in findings of variable indicates that sample
mean is close to population mean. Additionally the findings regarding variables of
possible causes of valuation variance and inaccuracy in above table fulfills statistical
rule as standard deviation must be greater than standard error.

The findings from the study revealed that valuation variance and inaccuracy exist within
the Hawassa city banks as no two valuation methods give same value opinion. It also

62
shows that continuous variation in valuation will increase the rate of customer‟s
dissatisfaction. Insufficient Political instability including peace and security, Lack of
professional association, as well as capacity buildings on training, Banks using per sq.m
rates rather than detail breakdown of items, No accurate market evidence (data),Client
pressure or influence, Lack of well updated standard, Using methods that not fits with
purpose of valuation, Characteristics of firms using general practice rather than
specialized scientific procedure, Errors in survey, Differences arising out of different
methodologies, Valuators level of experience, Insufficient depth of investigation, Errors
in procedure, Lack of professional property valuer are identified and ranked as possible
causes of valuation variance and inaccuracy in Hawassa city. Among the causes of
valuation variance and inaccuracy identified above, Insufficient Political stability,
peace, and security was ranked first with the highest frequency and mean score. So that
third specific objective that is identification of possible cause of valuation variance and
inaccuracy is addressed.

4.3 Case Study on Selected Properties in Hawassa City

Case study focus on the assessment of real property valuation approaches of banks with
its accuracy on selected properties in Hawassa city. To examine this, a selection has
been made of commercial properties and residential properties that are evaluated by
respective bank in Hawassa city. The value of selected property is determined by other
banks in Hawassa city for comparative analysis.

The valuation calculations are done based on detailed provisions on banks valuation
format with the respective market conditions. After the determination of the values, the
outcome is compared each other with banks as well as detail construction/improvement
costing to replace similar properties. A total of four commercial properties and two
residential properties that are valuated recently in 2019 G.C are selected based on non-
probabilistic sampling. The selected buildings are properties or buildings under
construction .i.e. finishing stage so the depreciation is neglected in all banks valuation.

Building Improvement/Construction Cost

As built building documents are prepared for buildings and approved by consultant
further if changes are major it is approved by municipality. According to interviewee of

63
Hawassa city administration construction department contract administration director
Ato Zinabu Dema Soressa, as built drawings are prepared by contractor and it should be
checked by consultant for inclusion of minor changes in design but if change in design
is major including structural element from original approved blue print it should be
revised by consultant before construction permit and approved by municipality. So that
as built design is prepared by contractor and checked by consultant so it is final
indicator of property built. Additionally as Built BOQ as part of that as built document
is final indicator of costs outlaid for projects. According to Ato Zinabu interviewee as
built BoQ for project is prepared by independent consultant and city administration
professionals approve that as built BoQ by detail investigation on quantities submitted,
stage of construction and detail comparison with city current market rate on request by
client.

Ato Alemayehu the city contract administration executive quantity surveyor on his own
said that their office have mandate to prepare market assessment and items construction
rate at least four times per year and construction supervision for all buildings in city,
and they have four types of rate developed yearly depending on market study and that
rate are prepared based on detail costing and comparison of consultants as built BoQ to
check weather developed BoQ is indicator of current market in city before approval.
Additionally the office have blue print of every building in city and construction quality
and progress because they supervises buildings that makes them to ensure weather
developed quantity in BoQ is indicator of project designs and progress. Finally they
ensured that as Built BoQ approved by municipality is the indicator of detail cost out
laid to construct that property. The following table summarizes real property selected
for case study with its plot, specific location and valuated bank.

Table 4.7 Properties Selected for a Case Study in Hawassa

Property Category Valuated Specific Plot area

by location (sq.m)
Property A Commercial Dashen Old Menharaia 1000
bank
Property B Commercial Dashen woldeamanuel 800
bank
Property C residential Awash bank Around view 250
hotel
Property D Commercial Dashen Old Menharaia 1000
bank

64
 Property E Commercial Dashen Old menharaia 1500
bank
Property F Residential COOP Guwe(Atote) 375

Location and Description of Property A

The subject fixed asset is located in Hawassa, which is the capital city of SNNPRS. The
fixed asset is a commercial building. The subject property A is located at the menharaia
- city left from south star international hotel and in front of Hawassa meskel square; a
few distances from the old bus station. The subject property of property A consists of an
approximately 1000 square meter land parcel which is improved by commercial
building. The land holding of the company is held under a leasehold interest. Notable
landmarks in the vicinity of the subject property include: a private mixed use building,
south star international hotel and main asphalt way to old bus station. The following
table summarizes constructed floor and its grade or class of construction.

Table 4.8 Detail breaks down of property A

Floors constructed Constructed/improvement Grade/class of construction

area(m2)
Basement floor 481 Class-4
Ground floor 499 Class-2
Mezzanine floor 144 Class-2
First-Fifth floor 2223 Class-2
Total 3347 m2
(Source: Dashen bank Hawassa district property valuation and appraisal office)

Valuation Approach

Valuation approach employed is Replacement cost method. The approach equates the
replacement cost of property with property market value. The replacement cost of
property can be calculated by:

Property value=location value+ floor slab area (m2) X Banks rate/m2 specified
construction grade of property within each floor.

65
Location Value

Location value is value of plot of land in birr amount based on banks land grade scale in
birr. According to Dashen bank property valuation format, bank have five land grade,
that is 4849,4058,3247,2471,1505 birr per sq.m for land grades 1,2,3,4 and 5
respectevely.Based on that value property A falls on grade one which is 4849 birr per
square meter. Total plot of land in lease agreement is 1000 square meter. So the value of
land=1000*4849=4,849,000 birr.

The Value of Replacement/Improvement

The selected property have as built BOQ, the property is B+G+M+5, commercial
property, which have eight different floors. The construction grade, slab area, banks rate
per grade of construction in square meter slab and property value per slab is
summarized in table below.

Table 4.9 Dashen Bank Construction Grade and Banks Rate

Floors constructed Constructed(m2) class of con Rate(birr) New

(A) (B) replacement
cost(A*B)
Basement floor 481 Class-4 8,271 3,971,351
Ground floor 499 Class-2 11,184 5,592,000
Mezzanine floor 144 Class-2 11,184 1,632,864
First-Fifth floor 2223 Class-2 11,184 24,739,008
Total 3347 m2 Total new replacement 35,942,223
cost in birr
(Source: Dashen bank Hawassa district property valuation and appraisal office)

Therefore, Value of property =value of land + Replacement cost of improvements.

=4,849,000 birr + 35,942,223 birr

=40,791,223 birr (Source: Dashen bank Hawassa district)
Improvement/construction cost of property A According to Detail Costing

Comparison of replacement cost of bank with detail costing (BOQ) of Hawassa market.
To calculate detail costing of property As built documents, such as built drawings from

66
client, updated rates from municipality and detailed market investigation is done to
cross check as built BoQ for property A. see the summary of as Built BoQ of property
A(Appendix-2) thus detail cost outlaid for property A is 47,968,634 birr.

Property value by replacement costing (BOQ) method be the summation of lease

interest paid for land, detail building/improvement cost and consultancy fee. Property
value=Lease paid + detail building cost + Consultancy fee, The location value of
property A is calculated as follows.

Total lease period is 58 years; remaining lease period is 46, years

The total lease paid, up to now is,

Advance payment-525,000 birr,

Yearly lease payment-31,410.26 birr paid for consecutive 12 years, including
yearly bank interest of 7%, which is(33608.97birr).(source-misrak sub city
municipality)
 Value of land=525,000birr + 12*33,608.97 birr=928,307.64 birr (source-Misrak
sub city municipality)
 Consultancy fee=750,000 birr(source-Client)
 Detail cost of building=47,968,634 birr

Therefore Total value of property A is=928,307.64birr +750,000birr+47,968,634 birr.

Property market value =49,646,941.64 birr, but Property value estimated by

Dashen bank=40,791,223 birr

Variance=40,791,223 birr - 49,649,941.64 birr= (8,855,718.64 birr), Variance in

%=17.84.Based on the above calculation Dashen bank is underestimated property by
8,855,718.64 birr or 17.84% when it is compared with detail cost required to obtain
land, cost for consultancy and construction/improvement. This in turn increases
customers dissatisfaction because of their asset is held in excess by 17.84%.

Comparison if the property is valued by other Banks in Hawassa city.

 The construction grade identification of all private banks of Hawassa city
engaged in real property valuation service is identical and the difference is land
value and rate per sq.m with in specific grade of construction.

67
Valuation of property-A, by Awash International Bank
Table 4.10 Construction Class and its Cost of Awash International Bank of Hawassa
District

Floors Constructed(m2) Rate(birr) New

class of con replacement
constructed
cost(A*B)
(A) (B)

Basement floor 481 Class-4 10,000 4,810,000

Ground floor 499 Class-2 15,000 7,485,000

Mezzanine floor 144 Class-2 15,000 2,160,000

First-Fifth floor 2223 Class-2 15,000 33,345,000

Total 3347 m2 Total new replacement cost in birr 47,800,000

(Source: Awash International bank Hawassa district property valuation and appraisal
office)

Land value is not considered in Awash bank valuation assessment for regional cities
(Source: Ato Abera-Awash Bank property valuator engineer and valuated samples by
bank), There for the value of property A, if it‟s valuated by Awash bank=47,800,000
birr but Property value in detail replacement cost in current market=49,646,941.64 birr

The difference is (1,846,941.64), if property is valued by awash bank; its value will be
under valuated by amount, 1,846,941.64 birr, which is 3.86% lower than detail costing
in current market.

Valuation of property A, by Cooperative Bank of Oromia

Details of construction/improvement cost of property A by COOP Bank is summarized

below.

68
 Table 4.11 Construction Grade and its Rate of COOP for Property A

Valuation of property A by Cooperative bank of oromia

class of Rate(birr New
Floors Constructed(m2)
constructio ) replacement
constructed
(A) n (B) cost(A*B)
Basement
481 Class-4 12,363 5,946,603
floor
Ground
499 Class-2 17,316 8,640,684
floor
Mezzanine
144 Class-2 17,316 2,493,504
floor
First-Fifth
2223 Class-2 17,316 38,493,468
floor
Total new replacement
Total 3347 m2 55,574,259
cost in birr
(Source: COOP bank Hawassa district property valuation and appraisal office)

Location value is considered by COOP, based on site visit and assessing manual of
COOP, the location of property A falls on grade 1, and plot of 801sqm to1000 sq.m,
which is 2460birr per sq.m. The value of land=1000sq.m *2460 birr/sq.m=2,460,000
birr

Engineering Consultancy Fee

Consultancy fee for project will be equal to 1.5% of building construction cost.(source
COOP manual and interview with COOP valuator Ato Samuel)

Consultancy fee=0.015*55,574,259birr= 833,613.885Birr

So that the value of Property A, if it is valued by COOP, will be=location value +

consultancy fee + replacement cost of building, which is
=2,460,000birr+833,613.88+55,574,259 birr=58,867,872.88birr but Property value in
detail replacement cost in current market=49,646,941.64 birr, The difference is
9,220,931.24 if property is valued by Cooperative bank of oromia, its value will be over

69
valuated by amount, 9,220,931.24 birr, which is 15.66% higher than detail costing in
current market.

Valuation of Property A, by Commercial Bank of Ethiopia

According to commercial bank of Ethiopia real property valuation manual, the value of
property=location value + cost of improvement cost-depreciation. Property A is new
building on finishing stage so depreciation is not deducted.

Location Value

Location value is considered by CBE, based on site visit and assessing manual of CBE,
the location of property A falls on grade 1, and plot of 801sqm to1000 sq.m, which is
2460birr per sq.m, Similar with COOP. For details of Commercial bank of Ethiopia
location value or land grading for properties located in Hawassa city (see Appendix-7).

Location value=1000*2460=2,460,000 birr

Building Replacement/Construction Cost

The current replacement cost of the improvement is assessed based on current
building/construction cost indices of the bank. From this, unit construction cost is
derived and further refined to reflect material differences in quality and materials of
construction and finishes as well as details of accommodation. The derived and adjusted
unit cost is applied to the gross floor area of the building.

According to CBE Building replacement cost=Total floor area *rate. To calculate the
value of property A, we have to add the total area of each item. The following table
summarizes over all floor area with rate per overall weight for floor area in birr.

70
 Table 4.12 Construction Grade and its Rate of CBE for Property A

Valuation of property A by CBE

Floors constructed Constructed(m2) Rate per sq.m New replacement
(A) (B) cost(A*B)
Basement floor 481
Ground floor 499
Mezzanine floor 144 13,200 44,180,400
First-Fifth floor 2223
Total 3347 Total new 44,180,400
replacement cost
in birr
(Source: CBE Hawassa district property valuation and appraisal office)
Property value as per CBE is summation of construction cost and location value

=44,180,400 birr+2,460,000 birr

=46,640,400 birr

Current market value as per detail replacement costing, cost paid for lease and
consultancy fee=49,646,941.64 birr, the difference is (3,006,541.64), which is under
valuated by amount 3,006,541.64 birr or by 6.5%.

Location and Description of property B

The subject fixed asset is located in Hawassa, which is the capital city of SNNPRS. The
fixed asset of Customer is a commercial building. The subject property A is located at in
front of Hawassa city municipality, woldeamanuel dubale square. The subject property
of property B consists of an approximately 800 square meter land parcel which is
improved by commercial building. The land holding of the company is held under a
leasehold interest. Notable landmarks in the vicinity of the subject property include: left,
a private commercial shop, in front of woldeamanuel dubale square, at end of two ends
crossing asphalt ways (from Atote-Warka-new bus station road and from old
menharaia-new stadium to new bus station). Property is first valuated by Dashen bank
Hawassa district and details of breakdown are listed below. Source: Dashen bank
Hawassa district property valuation and appraisal office.

71
Valuation Approach

Valuation approach employed is Replacement cost method. The approach equates the
replacement cost of property with property market value. The replacement cost of
property can be calculated by Property value=location value+ floor slab area (m2) X
Banks rate/m2 specified construction grade of property within each floor.

Location Value

Location value is value of plot of land in birr amount based on banks land grade scale.
According to Dashen bank property valuation format, bank have five land grade, from
that value for property one falls on grade one which is 4849 birr per square meter. Total
plot of land in lease agreement is 800 square meter. So the value of land=800*4849=
3,879,200 birr.

The value of Replacement/Improvement

The property is B+G+5, commercial property, which have 7 different floors. The
construction grade, slab area, banks rate per grade of construction in square meter slab
and property value per slab is summarized in table below.

Table 4.13 Dashen Bank Construction Class and its Rate per sq.m for Property B

Floors constructed Constructed(m2) class of con Rate(birr) New

(A) (B) replacement
cost(A*B)
Basement floor 441 Class-4 3,647,511 3,647,511
Ground floor 444 Class-2 4,965,696 4,965,696
First floor 427 Class-2 4,775,568 4,775,568
Second-Fifth floor 1836 Class-2 20,533,824 20,533,824
Total 3148 Total new replacement 33,922,599
cost in birr
(Source: Dashen Bank Hawassa district property valuation and appraisal office)
Therefore, Value of property =value of land + Replacement cost of improvements.

=3,879,200 birr + 33,922,599 birr

=37,801,799 birr (Source: Dashen bank Hawassa district)

72
Comparison of Replacement Cost of Property B by Bank with Detail Costing
(BOQ) of Hawassa Market

To calculate detail costing of property as built documents, such as drawings from client,
updated rates from municipality and detailed market investigation is done. The
summary of as Built BoQ of property B (refer Appendix-3, municipality approved as
built BOQ for property B, which is birr 38,950,367.19). Property value by replacement
costing (BOQ) method be the summation of lease interest paid for land, detail
building/improvement cost and consultancy fee.

Property value=Lease paid + detail building cost + Consultancy fee, The location value
of property B is: Total lease period is 58 years; remaining lease period is 46, years, The
total lease paid, up to now is,

Advance payment- 44,800birr,

Yearly lease payment- 10,338birr paid for consecutive 12 years, including
yearly bank interest of 6.5%., which is- 11061.66birr.
Value of land=44,800birr + 12*11061 birr= 177,539.92birr (source-
menharaia sub city municipality.
Consultancy fee=600,000 birr(source-Client)
Detail cost of building=38,950,367.19birr

Therefore Total value of property A is=177,539.92birr +600,000birr+38,950,367.19

birr. Thus Property value =39,727,907.11birr but Property value estimated by Dashen
bank=37,801,799 birr, Variance=37,801,799 birr-39,727,907.11 birr=
(1,926,108.11birr), Variance in %=5.

Based on the above calculation Dashen bank is underestimated property by

1,929,108birr or 5%, when it is compared with detail cost required to obtain land, cost
for consultancy and construction/improvement.

Comparison If the Property B is Valued by Other Banks in Hawassa City.

 The construction grade identification of all private banks of Hawassa city

engaged in real property valuation service is identical and the difference is land
value and rate per sq.m with in specific grade of construction.

73
Valuation of Property-B, by Awash International Bank

Table 4.14 Awash bank construction grade and rate per sq.m for property B

Valuation of property B by Awash Bank

Floors Constructed(m2) class of Rate(birr) New replacement
constructed (A) con (B) cost(A*B)
Basement floor 441 Class-4 10,000 4,410,000
Ground floor 444 Class-2 15,000 6,660,000
First Floor 427 Class-2 15,000 6,405,000
Second-Fifth 1836 Class-2 15,000 27,540,000
floor
Total 3347 m2 Total new 45,015,000
replacement cost in
birr
(Source: Awash International Bank Hawassa district property valuation and
appraisal office)
Land value is not considered in awash bank valuation assessment for regional
cities.(source Ato Abera-awash bank property valuator engineer and valuated samples
by bank)

There for the value of property B, if it is valued by Awash bank=45,015,000birr but

Property value in detail replacement cost in current market=39,727,907.1birr,The
difference is 5,287,092.9 birr, if property is valued by Awash bank; its value will be
over valuated by amount, 5,287,092.9 birr, which is 11.8% higher than detail costing in
current market.

74
Valuation of property B, by Cooperative Bank of Oromia

Table 4.15 Construction grade and its rate per sq.m floor of COOP Bank for property B

Valuation of Property B by Cooperative Bank of Oromia

Floors Constructed(m2) class of Rate(birr) New replacement

constructed con cost(A*B)
(A) (B)
Basement 441 Class-4 12,363 5,452,083
floor
Ground floor 444 Class-2 17,316 7,688,304
First Floor 427 Class-2 17,316 7,393,932
Second-Fifth 1836 Class-2 17,316 31,792,176
floor
Total 3347 m2 Total new 52,326,495
replacement cost in
birr
(Source: COOP Bank Hawassa district property valuation and appraisal office)
Location value is considered by COOP, based on site visit and assessing manual of
COOP, the location of property 1 falls on grade 1, and plot of 601sqm to800 sq.m,
which is 3279 birr per sq.m. The value of land=800sq.m *3279 birr/sq.m=
2,623,200birr.

Consultancy Fee

Consultancy fee for project will be equal to 1.5% of building construction cost.(source
Coop manual and interview with COOP valuator Ato Samuel).Therefore Consultancy
fee=0.015*52,326,495 birr= 784,897 Birr, So that the value of Property B, if it is valued
by COOP, will be=location value + Consultancy fee + replacement cost of building,
which is =2,623,200birr+784,897+52,326,495 birr=55,734,592 birr but Property value
in detail replacement cost in current market is 39,727,907.1birr.The difference is
16,006,684.9 birr, if property is valued by Cooperative bank of Oromia,its value is over

75
valuated by amount 16,006,684.9 birr, which is 28.7% higher than detail costing in
current market

Valuation of Property-B, by CBE

Land Value

Land value falls in grade one, range of 601-800 sq.m, which have value of 3279 birr per
sq.m

Land value=800*3279=2,623,200 birr

Building replacement cost is birr 30,850,400

Table 4.16 CBE, Total Constructed Floor Area and its Factor in Birr Per Weight Per
sq. Meter for Property B

Valuation of property B by CBE

Floors Constructed(m2 Rate per sq.m (B) New
constructed )A replacemen
(A) (B) t cost(A*B)
Basement floor 441
Ground floor 444
First Floor 427
Second-Fifth 1836
floor 9,800 30,850,400
Total 3148 Total new replacement 30,850,400
cost in birr
(Source: CBE Hawassa district property valuation and appraisal office)
So value of Property B, as per CBE is=location value+ building improvement
cost=2,623,200 birr+30,850,400 birr=33,473,600 birr but Property value in current
market=39,727,907.11 birr. The difference is (6,254,307.11), so property B is
undervalued by CBE, by amount 6,254,307.11 which is lower from market by 18.7%.

Descriptions of Property C

The subject fixed asset is located in Hawassa, which is the capital city of SNNPRS. The
fixed asset of customer is a residential building. The subject property C is located at the
Tabor sub city - left from main asphalt road from atote to new bus station and in front
76
of Sidama coffee; a few distances from the Hawassa city municipality. The subject
property of property C consists of an approximately 250 square meter land parcel which
is improved by residential building. The land holding of the company is held under a
leasehold interest. Notable landmarks in the vicinity of the subject property include: a
private mixed use building, coble stone road at back and main asphalt way to new bus
station.

Valuation of Property C by Awash International Bank

Table 4.17 Construction Grade/class and its Rate of Awash International Bank for
Property C

Valuation of property C by Awash Bank

Floors Constructed(m2) class of Rate(birr) New
constructed con replacement
(A) (B)
cost(A*B)
Basement floor 205 Class-4 10,000 2,050,000
Ground floor 170 Class-4 10,000 1,700,000
First Floor 165 Class-4 10,000 1,650,000
Second-Fourth 420 Class-4 10,000 4,200,000
Total 960 Total new replacement 9,600,000
cost in birr

(Source: Awash International Bank, Hawassa district property valuation and

appraisal office)
Property value as per awash international bank is equal with building replacement cost
which is 9,600,000birr.

Property Valuation of Property C by Detail Costing in Current Market

Value of property C, as per detail costing to replace similar building and related
activities is amount of money paid to obtain land, consultancy fee and building
construction cost.

Location Value

Land plot of area 250 sq.m is obtained by lease interest and paid amount up to know is
equal to 320,000 birr(source;tabour sub city municipality).So land value paid is 320,000
birr
77
Consultancy fee=180,000 birr (design and construction supervision)-source: client

Building Construction/Improvement Cost

Building replacement (construction cost in current price) is described in Appendix-4,

which is 9,985,741.34 birr. So value of property C in current Hawassa market be the
summation of cost paid to obtain land, consultancy fee and building construction or
improvement cost.

Value of property C=320,000 birr+ 180,000 birr + 9,985,741.34 birr=10,485,741.34

birr, The difference is (885,741.34 birr), meaning that the building is under valuated by
Awash bank in amount 885,741.13 birr which is 9%.

Comparison if the Property C is Valued by Other Banks in Hawassa City

Valuation by Dashen Bank

Location Value

Location of site is categorized under grade one and its Value=plot of area*rate

=250*4849= 1,212,250 birr

Building Improvement Cost

Table 4.18 Construction class and its rate per sq.m of Dashen bank for property C

Valuation of property C by Dashen Bank

Floors Constructed(m2) class of Rate(birr) New
constructed (A) construction (B) replacement
cost(A*B)
Basement floor 205 Class-4 10,522 2,157,010

Ground floor 170 Class-4 10,522 1,788,740

First Floor 165 Class-4 10,522 1,736,130
Second-Fourth 420 Class-4 10,522 4,419,240

Total 960 Total new replacement cost 10,101,120

in birr

78
So value of property C in dashen bank assessment=location value + building
improvement cost

=1,212,250 birr + 10,101,120 birr=11,313,370 birr

Current market value=10,485,741.34 birr, difference is 827,629 birr, so in dashen bank

the property C is over valuated in amount 827,629 birr which is 7.3%.

Valuation of Property C by Cooperative Bank of Oromia

Location Value

According to land grading of COOP, plot of property c falls on grade one, its value is
5000 birr per sq.m. Land value=250*5000=1,250,000 birr

Consultancy Fee

Consultancy fee is considered as 1.5% of building improvement cost, which will be

=0.015*8,485,440=127,281.6birr.so that consultancy fee (design and supervision cost)
is 127,281.6 birr

Building improvement (construction) cost

Table 4.19 Construction Class and its Rate of COOP Bank for Property C

Valuation of Property C by COOP

Floors Constructed(m2) class of Rate(birr) New
constructed (A) con (B) replacement
cost(A*B)
Basement floor 205 Class-4 8,839 1,811,995
Ground floor 170 Class-4 8,839 1,502,630
First Floor 165 Class-4 8,839 1,458,435
Second-Fourth 420 Class-4 8,839 3,712,380
Total 960 Total new replacement 8,485,440
cost in birr
(Source: COOP Hawassa district property valuation and appraisal office)

79
Value of property C, if it is valued by COOP=location value + consultancy fee +
building improvement cost. Which is 1,250,000 birr +127,281.6 birr +8,485,440 birr
=9,862,722 birr but Current market value of property C=10,485,741.34 birr, the
difference is (623,020birr), meaning that property be under valuated by COOP by
amount 623,020 birr which is 6.3%.

Valuation of Property C by CBE

Land Value

Land value for property C falls in grade one, range of 201-400 sq.m for residential,
which have value of 2430 birr per sq.m, so Land value=250*2430=607,500 birr

Building Improvement Cost

Table 4.20 Total Floor Area and its Weight or Factor per sq.m Floor of CBE for
Property C

Valuation of Property C by CBE

Floors Constructed(m2) Rate per sq.m(B) New
constructed replacement
(A) cost(A*B)
Basement floor 205

Ground floor 170

8,100 7,776,000
First Floor 165

Second-Fourth 420

Total 960 Total new 7,776,000

replacement cost in
birr.
(Source: CBE Hawassa district property valuation and appraisal office)
The value of property as per CBE is summation of location value and building
improvement cost. Value of property C=607,500 birr + 7,776,000 birr= 8,383,500 birr
but Current market value of property C=10,485,741.34 birr, so the difference is
(2,102,241.34 birr), the value of property C, is under valuated by amount 2,102,241.34
birr which is 25%.

80
Description of Property D

The subject fixed asset is located in Hawassa, which is the capital city of SNNPRS. The
fixed asset of customer is a commercial building. The subject property D is located at
the Misrak sub city - left from main asphalt road from south star hotel to old bus station
and in front of millennium aderash, front of SNNPRS agricultural research institute in
opposite way. The subject property of property D consists of an approximately 1000
square meter land parcel which is improved by commercial building. The land holding
of the company is held under a leasehold interest. Notable landmarks in the vicinity of
the subject property include: a private mixed use building, coble stone road at left,
private mixed use at back and front main asphalt way to old bus station. Property D is
valued by Dashen bank for loan purpose as follows

Location Value

According to Dashen bank land grading, the parcel of land for property D, is
categorized as grade one, and its rate is 4849 birr per square meter. So that location
value is=1000*4849=4,849,000 birr

Building Improvement/Construction Cost

Table 4.21 Construction Class and its Rate in Birr per sq.m of Dashen Bank for
Property D

Valuation of Property D by Dashen Bank

Floors Constructed(m class of Rate(birr) New
2
constructed ) con replacement
(A) (B) cost(A*B)
Basement floor 482 Class 1 15,255 7,352,910

Ground floor 472 class 1A 17,534 8,276,048

mezzanine floor 342 class 1A 17,534 5,996,628

first floor 472 class 1A 17,534 8,276,048

second floor 469 class 1A 17,534 8,223,446

third floor 377 class 1A 17,534 6,610,318

81
 fourth to six 1035 class 1A 17,534 18,147,690
floor
Total 3649 Total replacement cost 62,883,088

(Source: Dashen Bank Hawassa district property valuation and appraisal office)
Value of property D be summation of location value and its improvement cost. Value of
property D as dashen bank=4,849,000 birr + 62,883,088 birr=67,732,088 birr

Comparison of Replacement Cost of Bank with Detail Costing (BOQ) of Hawassa

Market

To calculate detail costing of property asbuilt documents, such as built drawings from
client, updated rates from municipality, continuous site visit and detailed market
investigation is done.

Building improvement cost as per detail replacement costing in current market for
property D (Refer Appendix-5) which is birr 73, 424,951.08.

Location Value:

Land is obtained by lease interest for 57 total lease periods. Total amount of cost of land
in lease agreement is 1,750,000 birr, from that,599,038.96 birr is paid as advance.so
total payment made for land up to know is summarized as follows:

Payment made for land=advance payment + cumulative tax (tax, modification and
penalty)

=599,038.96 birr + 744,737.94 birr

=1,343,776.90 birr (Source: misrak sub city municipality)

Consultancy Fee

Cost outlays for design and construction supervision is 950,000 birr. (Source-client),so
that Consultancy fee is 950,000 birr. Then the value of property D as detail cost outlaid
for property is summation of detail building construction cost, location value and
consultancy fee.

Value of property D=73,424,951.08 birr + 1,343,776.90 birr + 950,000

birr=75,718,727.98 birr, but Dashen bank valuation is 67,732,088 birr. The difference is
82
(7,986,639.98birr), meaning that dashen bank is under valuated property D by amount
5,692,863.08 birr which is 11.8%.

Valuation of Property D by Other Banks in Hawassa City

Valuation by Awash International Bank

According to awash international bank, Property value is equal with building

improvement cost.

Table 4.22 Construction Class and its Rate per sq.m of Awash International Bank for
Property D

Valuation of Property D by Awash Bank

Floors Constructed(m2) class of Rate(birr) New
constructed (A) con (B) replacement
cost(A*B)
Basement floor 482 Class 1 15,000 7,230,000

Ground floor 472 class 1A 20,000 9,440,000

mezzanine floor 342 class 1A 20,000 6,840,000

first floor 472 class 1A 20,000 9,440,000

second floor 469 class 1A 20,000 9,380,000
third floor 377 class 1A 20,000 7,540,000
fourth to six floor 1035 class 1A 20,000 20,700,000

Total 3649 Total new 70,570,000

replacement cost
(Source: Awash International Bank Hawassa district property valuation and
appraisal office)
So value of property D by Awash bank is 70,570,000 birr but Current market value is
75,718,727.98 birr. The difference (5,148,727.98birr), i.e., property D will be under
valuated by amount 5,148,727.98 birr, which is 7.3%.

83
Valuation of Property D by COOP

Location Value

Location value calculation seems similar with CBE, that the land parcel of property D is
categorized under grade one, with range of 801-1000 sq.m, which is birr 2460 birr per
sq.m. Location value=1000*2460=2,460,000 birr.

Building Improvement/Construction Cost

The following table summarizes details of valuation of property D by COOP bank.

Table 4.23 Construction Class and Rate of COOP Bank for Property D

Valuation of property D by COOP

Floors Constructed(m2 ) Rate(birr) New replacement
class of con
constructed (A) (B) cost(A*B)

Basement floor 482 Class 1 17,316 8,346,312

Ground floor 472 class 1A 19,176 9,051,072
mezanine floor 342 class 1A 19,176 6,558,192
first floor 472 class 1A 19,176 9,051,072
second floor 469 class 1A 19,176 8,993,544
third floor 377 class 1A 19,176 7,229,352
fourth to six
class 1A 20,000 20,700,000
floor 1035
Total 3649 Total new replacement 69,929,544

(Source: COOP Hawassa district property valuation and appraisal office)

Consultancy Fee
Consultancy fee=1.5%*building improvement cost.

=0.015*69,929,544

=1,048,943 birr

Value of property D by COOP is summation of location value, building construction

cost and consultancy fee. i.e. 2,460,000 birr + 69,929,544 birr + 1,048,943
birr=73,438,487 birr, current market value=75,718,727.98 birr. The difference is
84
(2,280,240.8 birr), meaning that property D be under valuated by amount 2,280,240.8
birr, which is 3.1%.

Valuation of Property D by CBE

Location Value

Location value calculation seems similar with COOP, that the land parcel of property D
is categorized under grade one, with range of 801-1000 sq.m, which is birr 2460 birr per
sq.m, Location value=1000*2460=2,460,000 birr.

Building Improvement Cost

Table 4.24 Total Constructed Floor and its Rate per Factor per Floor Area in sq.m

Valuation of Property D by CBE

Floors Constructed(m2) Rate per sq.m floor New
constructed (A) replacement
cost(A*B)
Basement floor 482

Ground floor 472

Mezzanine floor 342

First floor 472

Second floor 469
18,100 66,046,900
Third floor 377

Fourth to six 1035

floor
Total 3649 Total new 66,046,900
replacement cost
(Source: CBE Hawassa district property valuation and appraisal office)
So value of property D, if it‟s valued by CBE is summation of location value and
building improvement cost. .i.e., 2,460,000 birr + 66,046,900 birr=68,506,900 birr,
current market value is 75,718,727.98 birr. The difference is (7,211,827.98 birr), the
building be undervalued by amount 7,211,827.98 birr which is 10.5%.

85
Descriptions of Property „‟E‟‟

The subject fixed asset is located in Hawassa, which is the capital city of SNNPRS
immediately front of old bus station. The fixed asset of customer is a commercial
building under construction and valuated by Dashen bank for loan financing purpose.
The subject property E is located in Misrak sub city - right from Bera Beer hotel, in
front of old bus station. The subject property of property E consists of an approximately
1500 square meter land parcel which is improved by commercial building. The land
holding of the company is held under a leasehold interest. Notable landmarks in the
vicinity of the subject property include: a private shops at right side, coble stone road at
rear side, Bera beer hotel at left side and from front main asphalt way from south star to
Yeshi hotel.

Valuation of Property E by Dashen Bank

Location Value

According to dashen bank land grading plot of property E is categorized as grade one its
value is 4849 birr per sq.m. So location value=1500*4849= 7,273,500 birr

Building Improvement/Construction Cost

Table 4.25 Construction Class and its Rate of Dashen Bank for Property E

Valuation of Property E by Dashen Bank

Floors Constructed( class of con Rate(birr) New
constructed m2) replacement
cost(A*B)
(A) (B)
Basement floor 1100 Class 1 15,255 16,780,500
Semi basement 918 class 1A 17,534 16,096,212
floor
Ground floor 897 class 1A 17,534 15,727,998
Mezzanine floor 818 class 1A 17,534 14,342,812
First floor 912 class 1A 17,534 15,991,008
Second floor 960 class 1A 17,534 16,832,640

86
 Third floor 698 class 1A 17,534 12,238,732
Fourth floor 840 class 1A 17,534 14,728,560
Six-seventh floor 1680 class 1A 17,534 29,457,120

Eiginth floor 813 class 1A 17,534 14,255,142

Nine-tenth floor 1626 class 1A 17,534 28,510,284

Eleventh floor 450 class 1A 17,534 7,890,300

service floor 822 class 1A 17,534 14,412,948
Total 12534 Total new replacement cost 217,264,256
(Source: Dashen Bank Hawassa district property valuation and appraisal office)
Value of property E by dashen bank valuation is summation of location value and
building improvement cost. i.e. 7,273,500 birr + 217,264,256 birr=224,537,756 birr

Valuation of Property E, in Current Market Detail Cost Outlays

For Comparison of replacement cost of bank with detail costing (BOQ) of Hawassa
market, Updated as built BoQ is calculated. To calculate detail costing of property As
built documents, such as built drawings from client, updated rates from municipality,
continuous site visit and detailed market investigation is done to check reality of
approved BoQ for property E,(see appendix-6) which is birr 226,274,889.18

Location Value

Plot of land for property E is owned by land lease hold interest with total lease period of
58 years with total cost of 3,250,000 birr. Total amount of money paid for parcel of land
up know is advance payment and yearly lease payment with penalty. i.e 1,125,000
birr+1,535,038 birr=2,660,038 birr, Land cost=2,660,038 birr (source misrak sub city
municipality record office)

Cost Paid for Design and Construction Supervision

Cost of service required for project which is categorized as design and construction
supervision fee outlaid for property E is 1,350,000 birr(source client).Consultancy
fee=1,350,000 birr. Therefore current market value of project based on detail cost
outlaid for property be the summation of building construction or improvement cost,
land cost and consultancy fee. .i.e 226,274,889.18 birr +2,660,038 birr + 1,350,000 birr

87
=230,284,927.18 birr, but dashen banks value=224,537,756 birr. The difference is
(5,747,171). i.e. property E is under valuated by dashen bank by amount 5,747,171 birr
which is 2.6%.

Valuation of Property E by Other Banks in Hawassa City

Valuation by Awash International Bank

Property value by Awash Bank is equal with building replacement cost. Break down
with rate of bank is summarized in table below.

Table 4.26 Awash International Bank Construction Class and its Rate for Property E

Floors constructed Construc class of Rate(bir New

ted(m2) con r) replacement
(A) (B) cost(A*B)
Basement floor 1100 Class 1 15,000 16,500,000
Semi basement floor 918 class 1A 20,000 18,360,000
Ground floor 897 class 1A 20,000 17,940,000
Mezanine floor 818 class 1A 20,000 16,360,000
First floor 912 class 1A 20,000 18,240,000
Second floor 960 class 1A 20,000 19,200,000
Third floor 698 class 1A 20,000 13,960,000
Fourth floor 840 class 1A 20,000 16,800,000
Six-seventh floor 1680 class 1A 20,000 33,600,000
Eighth floor 813 class 1A 20,000 16,260,000
Nine-tenth floor 1626 class 1A 20,000 32,520,000

Eleventh floor 450 class 1A 20,000 9,000,000

service floor 822 class 1A 20,000 16,440,000
Total 12534 Total new 245,180,000
replacement cost
(Source: Awash International Bank Hawassa district property valuation and
appraisal office)
Value of property E by Awash bank is 245,180,000 birr, current market value is
230,284,927.20birr, and the difference is 14,895,072.8 birr. .i.e the property E will be
over valuated by amount 14,895,072.8 birr which is 6%.

88
Valuation of Property E by Cooperative Bank of Oromia

Location Value

Location of property E as COOP is grade one range of 1001-1500, which is birr 1845
per sq.m, Location value is 1500*1845=2,767,500 birr

Building Improvement/Construction Cost

Table 4.27 COOP Bank Construction Class and its Rate for Property E

Valuation of property E by COOP

Floors Constructed(m2 class of con Rate(bir New replacement

constructed ) r) cost(A*B)
(A) (B)
Basement floor 1100 Class 1 17,316 19,047,600

Semi basement 918 class 1A 19,176 17,603,568

floor

Ground floor 897 class 1A 19,176 17,200,872

Mezzanine floor 818 class 1A 19,176 15,685,968

First floor 912 class 1A 19,176 17,488,512

Second floor 960 class 1A 19,176 18,408,960

Third floor 698 class 1A 19,176 13,384,848

Fourth floor 840 class 1A 19,176 16,107,840
Six-seventh floor 1680 class 1A 19,176 32,215,680

Eiginth floor 813 class 1A 19,176 15,590,088

Nine-tenth floor 1626 class 1A 19,176 31,180,176

Eleventh floor 450 class 1A 19,176 8,629,200

service floor 822 class 1A 19,176 15,762,672

Total 12534 Total new replacement 238,305,984
cost

89
Consultancy Fee

Consultancy fee=0.015*238,305,984=3,574,589.76 birr

Value of property E according to COOP is summation of location value, building

improvement cost and consultancy fee. .i.e 2,767,500 birr +238,305,984birr
+3,574,589.76 birr=244,648,074 birr but Market value of property E is 230,284,927.20
birr, the deference is 14,363,146.56 birr, property will be over valuated by COOP by
amount 14, 363,146,.56 birr, which is 5.87%

Valuation of Property E by CBE

Location Value

Location of property E as CBE is grade one range of 1001-1500, which is birr 1845 per
sq.m, which is similar with COOP. so that location value is 1500*1845=2,767,500 birr

Building Construction /Improvement Cost

Table 4.28 CBE Total Constructed Area its Weight in Birr per sq.m for Property E

Valuation of Property E by CBE

Floors Constructed(m2) Rate(birr) New replacement
constructed cost(A*B)
(A) (B)
Basement floor 1100

Semi basement 918

floor

Ground floor 897

Mezzanine 818
floor
First floor 912

Second floor 960

Third floor 698

Fourth floor 840

90
 Six-seventh 1680
floor

Eighth floor 813

17200 215,584,800
Nine-tenth 1626
floor

Eleventh floor 450

Service floor 822

Total 12534 Total new 215,584,800

replacement cost
(Source: CBE Hawassa district property valuation and appraisal office)

The value of property E according to CBE is summation of land value and building
improvement cost. i.e. 2,767,500 birr + 215,584,800 birr=218,352,300 birr, current
market value of property E is 230,284,927.20 birr, difference is (11,932,627.2
birr),according to CBE, the value of property E is undervalued by amount 11,932,627.2
birr which is 5.46%.

Descriptions of Property F

The subject fixed asset is located in Hawassa, which is the capital city of SNNPRS. The
fixed asset of customer is a residential building in operation stage valuated by
cooperative bank of Oromia for loan financing purpose. The subject property F is
located at the menharaia sub city – left from main asphalt of Atote. The subject property
of property F consists of an approximately 375 square meter land parcel which is
improved by residential building. The land holding of the owner is his own transferred
from family as inheritance. Notable landmarks in the vicinity of the subject property
include: a private residences at three sides and one cobblestone road at front side of
property.

91
Valuation by COOP

Location Value

Parcel of land property F located fall in grade two according to COOP land grading
scale for residential buildings, that is 3550 birr per sq.m.(source cooperative bank of
oromia Hawassa district valuation format).Location value=350*3550= 1,331,250 birr

Building Construction/Improvement Cost

The following table summarizes constructed floor, class of construction and bank rate in
birr per sq.m floor.

Table 4.29 Construction Grade and its Rate of COOP Bank for Property F

Valuation of Property F by COOP

Floors Constructed( class of Rate(birr) New
constructed m2) con replacement
(A) (B) cost(A*B)
Main house 67.79 Class 4 3,350 227,097
Service 59.95 class 4 3,350 200,833
quarter1
Service 35.49 class 5 2,145 76,126
quarter2
Store 43.66 class 6 1,370 59,814
Total 206.89 Total new replacement 563,869
cost
(Source: COOP Hawassa district property valuation and appraisal office)

Building construction cost=563,869 birr

Consultancy Fee (Design and Supervision Cost)

Supervision fee is 0.015*563,869= 19,968.75 birr, Then the Value of property F as

COOP is =1,331,250 birr +563,869 birr + 19,968.75 birr=1,915,088 birr

92
Valuation of Property F in Current Market Based on Detail Cost Outlaid to
Replace Property

To calculate detail cost of property F, due to its size of building there is no detail design
available, to fill that gap actual site measurement is taken, updated rates from
municipality, continuous site visit and detailed market investigation is done. As built
BOQ of property F (refer Appendix-7), which is birr 667,530.22.So building
construction/improvement cost is 667,530.22 birr.

Land Value

Land is owned by inheritance, so the property owner can transfer that land to other user
based on legislation set. So that the value of land is seen in differently from lease hold
land and its price is determined in local market for private property by home licensed
brokers. Land and building sales information from brokers can be reliable data source
(Mark, 2000). Owned land cost is obtained from licensed land brokers, as they said due
to political instability the value of owned land is slowed and the parcel of land of
property F currently is from 800,000-1,000,000 birr. Now for calculation let me use
upper value. .i.e. 1,000,000 birr

Location value=1,000,000 birr

Consultancy Fee

To complete design and supervision service for simple villa homes consultants ask
average value up to 120,000 birr(source interview Tibeb consulting architects managing
director).So for calculation 120,000 birr is taken. Consultancy fee=120,000 birr, So
value of property F in current market is summation of building construction cost, land
cost and consultancy fee, .i.e. 667,530.22 birr +1,000,000 birr +120,000 birr=1,683,869
birr, but Value of property F according to COOP is 1,915,088 birr, the difference is
231,219 birr, meaning that property F is overvalued by COOP amount of 231,219 birr
which is 12%.

93
Valuation of Property F by other banks in Hawassa City

Valuation by Dashen Bank

Location Value

According to dashen bank land grading parcel of land of property F is categorized as

grade two, that is 4058 birr per sq.m. Location value=375*4058=1,521,750 birr

Building Construction or Improvement Cost

Table 4.30 Construction Class and its Rate Per sq.m of Dashen Bank for Property F

Valuation of property F by Dashen bank

Floors Constructed( class of Rate(birr) depri.
2
constructed m) con replacement
(A) (B) cost(A*B)
Main house 67.79 Class 4 4,209 285,315
Service 59.95 class 4 4,209 252,318
quarter1
Service 35.49 class 5 3,536 125,478
quarter2
Store 43.66 class 6 3,536 154,364
Total 206.89 Total depr..replacement 817,475
cost
(Source: Dashen Bank Hawassa district property valuation and appraisal office)

Value of property F=location value +improvement cost.

=1,521,750 birr +817,475 birr=2,339,225 birr

Market value of property F is 1,683,869 birr, the difference is 655,356 birr, meaning
that property F is over valuated by dashen bank by amount of 655,356 birr which is
28%.

94
Valuation of Property F by Awash International Bank

Table 4.31 Construction Class and its Rate of Awash International Bank for property F

Valuation of Property F by Awash Bank

Floors Constructed(m class of con Rate(birr depri.
2
constructed ) ) replacement
(A) (B) cost(A*B)
Main house 67.79 Class 4 8,000 542,320
Service 59.95 class 4 8,000 479,600
quarter1
Service 35.49 class 5 6,000 212,940
quarter2
Store 43.66 class 6 5,500 240,130
Total 206.89 Total depr..replacement 1,474,990
cost
(Source: Awash International Bank Hawassa district property valuation and appraisal
office)

Valuation of property F is equal with building improvement or construction cost. i.e

1,474,990 birr, but Market value of property F is 1,683,869 birr, the difference is
(208,879 birr),property F be under valuated by amount 208,879 birr that is 14%.

Valuation of Property F by CBE

Location Value

Location of property F based on CBE land grading be in grade 2, ranging from 201-400
sq.m that is birr 1620 per sq.m. Location value=375*1620=607,500 birr

95
 Building Construction or Improvement Cost

Table 4.32 Total Constructed Area its Weight in sq.m Per in Birr of CBE for Property F

Valuation of Property F by CBE

Floors Constructed( Rate per sq.m depri. replacement
constructed m2) cost(A*B)
(A) (B)
Main house 67.79
Service quarter1 59.95

Service quarter2 35.49

3500 724,115
Store 43.66
Total 206.89 Total depreciated 724,115
replacement cost
(Source: CBE Hawassa district property valuation and appraisal office)

Value of property F by CBE is summation of location value and building improvement

cost. =607,500 birr + 724,115 birr=1,331,615 birr, but current market value is 1,683,869
birr, the difference is (352,254 birr). i.e., the property F is undervalued by amount
352,254 birr that is 26.5%

Summary of Valuation by Dashen Bank

Table 4.33 Comparison of Dashen Bank Valuation with Current Market Value

Proper Dashen bank Detail costing variation Variation in Variation

ty by current % ranges in %
market
A 40,791,223 49,646,941.64 -8,855,718.64 -21.70986303

B 37,801,799 39,727,907.11 -1,926,108.11 -5

C 11,313,370 10,485,741.34 827,628.66 7.315491847
D 67,732,088 75,718,727.98 -7,986,639.98 -11.79151598
-21% to 28%
E 224,537,756 230,284,927 -5,747,171.20 -2.55955671
F 2,339,224.80 1,683,869 655,355.55 28.01592861

96
 250,000,000

200,000,000

150,000,000
Dashen bank
100,000,000 current market

50,000,000

0
A B C D E F

Figure 4-4 Chart Showing Valuation of Dashen Bank with Market

Summary of Valuation by Awash International Bank

Table 4.34 Awash International Bank Valuation Variation with Current Market

Range of
Proper Awash Detail costing variation Variation in % variation
ty bank by current
market
A 47,800,000 49,646,941.64 -1,846,942 -3.863894644
B 45,015,000 39,727,907.11 5,287,092 11.74518025
C 9,600,000 10,485,741.34 -885,741 -9.22647229
D 70,570,000 75,718,727.98 -5,148,727 -7.295916083
-14% to
E 245,180,00 230,284,927.2 14,895,072. 6.07515817
12%
0 0 8
F 1,474,990 1,683,869 -208879.25 -14.16140109

97
 300,000,000

250,000,000

200,000,000

150,000,000 Awash bank

Detail costing by current market
100,000,000

50,000,000

0
A B C D E F

Figure 4-5 Chart of Valuation Variation of Awash International Bank with Current
Market

Summary of Valuation by COOP

Table 4.35 Summary of Valuation by COOP Bank with Current Market Value of
Properties

Property COOP Detail costing variation Variation in

by current % Ranges of
market variation
A 58,034,259 49,646,941.64 8,387,317 14.45235539
B 55,734,592 39,727,907.11 16,006,684 28.7194798
C 9,862,721.60 10,485,741.34 -623,019.74 -6.316914998 -6 to 28 %
D 73,438,487 75,718,727.98 -2,280,240 -3.104967263
E 244,648,073 230,284,927.20 14,363,146 5.870942034
F 1,915,088 1,683,869 231,219 12.07353135

98
 300,000,000

250,000,000

200,000,000
COOP
150,000,000
Detail costing by current
100,000,000 market

50,000,000

0
A B C D E F

Figure 4-6 Chart Showing Valuation Variance of COOP Bank with Current Market
value

Summary of Valuation by CBE

Table 4.36 Summary of Valuation of CBE with Current Market Value

Propert CBE Detail costing variation Variation in Variation

y by current % ranges
market
A 46,640,400 49,646,941.64 -3,006,542 -6.446217528

B 33473600 39,727,907.11 -6254307.11 -18.6842978

C 8,383,500 10,485,741.34 -2,102,241.34 -25.07593893
D 68,506,900 75,718,727.98 -7,211,827.98 -10.52715563
0 to -26 %
E 218,352,300 230,284,927.20 -11,932,627.2 -5.464850702
F 1,331,615 1,683,869 -352,254 -26.45316026

99
 250,000,000

200,000,000

150,000,000
CBE

100,000,000 Detail costing by current market

50,000,000

0
A B C D E F

Figure 4-7 Chart Showing Valuation Variance of CBE with Current Market Value
To conclude: Summary of valuation variation ranges of Dashen bank, Awash
international bank, Cooperative bank of oromia and Commercial bank of Ethiopia is (-
21% to 28%),(-14% to 12%),(-6 to 28 %),(-26 to 0%) respectively.

Mean of lower range=-21-14-6-26=-67/4=-16.75%, approximately -17%.

Mean of high range=28+12+28+0=68/4=17%

So that based on assessment done on four banks in Hawassa city taking 6 properties as
case study the valuation variation and accuracy is +/- 17%.

Response of National Bank of Ethiopia on Valuation Variation

National bank of Ethiopia is regulatory body of all private and public banks. The
National Bank of Ethiopia Engineering team leader is asked about the variation of banks
valuation and he replied as „‟NBE not control entire system of banks real property
valuation rates including salaries of employers. Even increasing and decreasing of
valuation scales are their bases of competition for customer attraction including skilled
employer on salary bases. Generally based on Licensing of Banking and Supervision
of Banks and Insurance Companies Proclamation (No. 84/1994) lending rates and
Banks entire systems are not controlled by NBE.

100
4.4 Discussion on Assessment of Real Property Valuation Approaches Used by
Bank in Hawassa City
The method of valuation used for all real properties in Hawassa city banks in all the
case studies was the replacement cost method. According to the property valuers who
were employed in banks in all case studies as well as document review the main official
reason for the extensive use of this method was the absence of active property market
evidence and the general lack of comparable sales as a result it is the easiest method
used to value real property. Replacement cost approach is based on the premise that the
costs of replacing productive assets. The approach involves direct replacement of real
property in current market so cost related to replace that assets are
improvement/building construction cost, costs paid to obtain land, as well as
consultancy fee as it has been reported in all case studies.

Based on assessment done on banks in Hawassa city there are variability in banks
assessment and current market value of property. Most of the results in all survey results
and case studies shows that within that cost approach some results are lower from
market value and others are higher than property value this in turn has impact on clients
as their property is used excess with under value this in turn created high customer
dissatisfaction, According to interviewee of CBE official in other hand over value
creates high risk on banks that if customer is unable to pay his loan, property value in
forced sell can be lower than money paid in advance as loan payments, so that the
variability should be close to market value. Based on literatures of developed country
trend and standards the accuracy value ranges from +/-5% to +/- 10% (2). The study on
Hawassa city on valuers opinion on accuracy acceptable level ranges from +/-5% to +/-
10, but Case study on properties shows that the variability in four banks mean value of
accuracy is +/- 17% which is in ranges from +/- 15% to +/- 20%. The variation resulted
from case study is significantly higher. The possible causes of debate of current market
value from banks valuation scale are listed and ranked based on respondents. Those
variables are identified from document analysis, ranked based on responses of valuers
and ranked causes are described below.

Problems of Political Instability, Peace and Security in City

The first ranked causes of current variability selected by bank valuers are current peace,
security and political situation of the city. As valuation and appraisal coordinators of

101
banks assured that the city commercial activity depends on tourism and investment, due
to recent problems related to politics, peace and security this business source is almost
died. As result the value of land, price of construction inputs, consultancy and other
related factors varies.

Lack of Professional Association, as Well as Capacity Buildings on Training

Professional association and valuers capacity building is selected as second rank by

valuers.as the valuer in banks are engineers professional associations regarding on
property valuation is vital to develop standards and manuals that best suits with market
as well as area of property. Additionally the service requires use of updated systems,
software‟s and additional technology development and training as market fluctuates the
value of building also changes so additional system and technology update is vital to
have accurate value of asset.

Using Per sq.m Rates Rather Than Detail Breakdown of Items

Per meter square assessment or areal assessment is identified as third cause of variation.
In replacement cost method area method and BOQ method can be used. Currently as
identified in case study and interviewee all banks use predetermined rate cost method.
During this calculation the quality or specification of materials, equipment and
workmanship used per all sq.m slabs is not identical. Even during valuation of property
under construction some uncovered items must be deducted as depreciation but factors
assigned are based on personal opinion rather than items completed in detail method of
measurement. The specification or construction class identified by banks per sq.m is not
indicative of current market, as it uses general method as excellent class, good
grade,economical,fair…etc….rather than using detail specialized methods that
indicates specification or building condition. Finally based on case studies done detailed
costing method is seen as best indicator of market value of properties.

Client Pressure or Influence

Client influence or pressure is seen as corruption, it is also categorized as major issue by

respondents that can cause valuation variability and inaccuracy. The process of property
valuation is that first order comes from client to bank, then the banks real property team
leader or valuation and appraiser officer then he can appoint or forward it to property
valuator(engineer) based on work loads of engineers in office. Then the engineer

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assesses the value of property and forwards it back to property appraiser officer. In this
process if the client and the engineer have blood relation, business relation or any
benefit, the engineer can increase the value of property as almost all of property
valuation format used by engineers in Hawassa banks are open for personal opinion or
judgment and there is no cross checking process if and only if client complains to the
officer in value of final result. Open market value of property is value resulted in arm‟s
length transaction between willing buyer and seller, so client pressure with valuation
engineer can create valuation variation and inaccuracy. Additionally based on
respondents response on identified gap from document analysis of banks valuation
procedures, formats, standards and manuals, the remaining factor that cause variations
rank is Lack of well updated standard, Using methods that not fits with purpose of
valuation, Characteristics of firms using general practice rather than specialized
scientific procedure, Errors in survey, Differences arising out of different
methodologies, Valuators level of experience, Insufficient depth of investigation, Errors
in procedure and Lack of professional property valuer respectively.

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 5. CONCLUSION AND RECOMMENDATION

5.1 Conclusion
 This research work examined how real property by banks is valuated and
accuracy of appraisal or closeness of valuation result to true market value of real
properties in Hawassa city. The main issues and practices related to real property
valuation, accuracy of valuation results and problems deemed to be cause for
variation have been discussed.
 The paper explored the principles and standards governing real property
valuation approaches, problems that surfaced from both banks perspective and
practical sides and the strategies used to solve them.
 Based on findings banks use plinth area method to calculate building
improvement or replacement cost even though estimation by BoQ method have
high accuracy than other estimation methods.
 All banks uses replacement cost method. By replacement cost method, market
value of real property is summation of costing of construction, location value
and other costs related to construct similar property subtract depreciation if
building is on operation stage. Banks uses floor area methods to calculate
replacement cost. But details costing have high accuracy when we compare it
with other methods.
 Based on document review, Cost approach is method of calculating replacement
cost of property and equating it as current market value of property. This
approach cannot be effective for properties generating profit. It is fact that
property constructed by one million birr can be sold by value greater than or less
than or equal to one million. So that the market value of income generating
properties depends on amount of yearly income and sellers and buyers strength
of negotiation in open market by arm‟s length transaction.
 In this study properties are calculated by both banks replacement method and
detail costing method so that the banks scale have high deviation from detail
costing here in study regarded as current market value.
 In Hawassa, outrageous figures were arrived by cause studies carried out by six
real properties assessment on four main district banks in city. i. e +/- 17% which
ranges(+/- 15% to +/- 20%). When we see it comparatively with developed
countries trend of (+/-5% to +/- 10%) the closeness to true value is unthinkable.

104
 In other words, valuation as it is presently carried out, is not a good proxy for
sale and mortgage transactions for properties in Hawassa city. Over and
undervaluation would not encourage strong economic development, since parties
(banks and real property owners or firms) would be wary of losing their
investment. The result therefore is stunted economic growth.
 Based on assessment carried out on banks valuation formats and manuals, the
procedures set is not fit with changing nature of real property market of
developing countries. Some banks take location value in consideration, even
with in that format banks location value not fits with current city master plan.
Others also not consider location value although location value is not considered
by banks of newly developed city just age of 4 years, but normal market value in
that vicinity by brokers is so high. It indicates that banks are not updating their
valuation formats even within four year.
 The findings of the study ascertain that the problems associated with the
valuation inaccuracy in approaches used, techniques applied and practices are
numerous and that the problems are Political instability and peace, Lack of
professional association, as well as capacity buildings on training, Banks using
per sq.m rates rather than detail breakdown of items, No accurate market
evidence (data), Client pressure or influence and Lack of well updated standard
takes highest rank among others. As a result of all these, market value of one
property valuation result varies from banks value.
 Finally valuation rates and procedures of building condition assessment on
grading of construction quality, value of land and consultancy fee vary with in
bank as well as from bank to bank in Hawassa due to assessments are open to
subjectivity and above listed problems.

105
5.2 Recommendation
Based on finding of research the following recommendations are forwarded.

 Banks should use more than one method according to property marketability
rather than replacement only.
 Banks valuation scale with in cost or price rate per sq.m of building not includes
all specification and items in detail, so that detail costing is better for banks as
well as real property owners.
 It is better for banks in Ethiopia in general and in Hawassa city particular must
develop their standards based on income approach for commercial properties
rather than sticking with cost approach.
 Participating banks should develop property valuation and related professional
associations.
 Academic sectors should support the services by research and development to
develop measures that would ensure valuation accuracy in practice.
 It is recommendable for Banks to use +/- multiplication factor for replacement
cost in situation of inherent conditions that creates difference from developed
cost scale and current situation.
 Additionally update of location value as well as valuation formats is vital to
reduce the problems in variance. Banks location value must develop
concurrently with city developments because in developing kebeles land cost is
high in brokers hand and that area is not included in banks location manual,
creates undervalue by bank finally results in high debate in banks result from
market value.
 Inadequate training has been identified as an important cause of valuation
inaccuracy, Universities and Polytechnics in Ethiopia general and at Hawassa
area in particular have a great role to play in this direction by restructuring their
programs to include teachings on contemporary techniques of valuation.

 Finally, future studies can focus on a larger sample size and covering different
cities to strengthen generalizing of findings on assessment of real property
valuation and its accuracy and study can also be focus on effectiveness of sales
comparison method and income valuation methods from replacement cost
methods for income generating properties.

106
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 Appendix-1 Possible Causes of valuation Variances
Table A 1 Possible causes of Valuation Variance and Accuracy with in Banks

5=Strongly Agree, 4=Agree, 3=Undecided, 2=Disagree and 1=Strongly Disagree

Reasons causes Property valuators

variation of property response Mean Standard Standard
valuated from current measurement scale score error deviation Rank
market values of 5 4 3 2 1
buildings.
Insufficient Political 27 4 0 0 0 4.8709677 0.06021 0.3352356 1
stablity,peace, security
Lack of professional 24 6 1 0 0 4.7419355 0.090871 0.505948 2
association, as well as
capacity buildings on
training
Banks using per sq.m 24 5 2 0 0 4.7096774 0.103965 0.57885 3
rates rather than detail
breakdown of items
No accurate market 23 6 1 1 0 4.6451613 0.125337 0.697849 4
evidence (data).
Client pressure or 20 10 1 0 0 4.6129032 0.098663 0.549335 5
influence.
Lack of well updated 22 6 2 1 0 4.5806452 0.135132 0.7523809 6
standard
Using methods that not 20 8 2 1 0 4.516129 0.141067 0.785428 7
fits with purpose of
valuation
Characteristics of firms 21 4 3 2 1 4.3548387 0.196475 1.093924 8
using general practice
rather than specialized
scientific procedure.
Errors in survey. 16 12 0 2 1 4.2903226 0.177821 0.990065 9

109
Differences arising out of 18 3 10 0 0 4.2580645 0.16428 0.914674 10
different methodologies.
Valuators level of 13 10 6 2 0 4.0967742 0.166714 0.928225 11
experience
Insufficient depth of 18 3 5 2 3 4 0.24567 1.367833 12
investigation.
Errors in procedure. 13 8 3 3 4 3.7419355 0.253868 1.413478 13
Lack of professional 5 4 3 13 6 2.6451613 0.24375 1.3571409 14
property valuer.

110
Appendix-2: Construction/ Improvement Cost of Property A

Table A 2Detail Breakdown of Asbuilt BoQ for Property A

Grand Summary of As Built BoQ for B+G+M+5 Commercial building

A-SUB STRUCTURE
1 Excavation and earth work........... Birr 1,246,957.74
2 Concrete work................................ Birr 1,900,388.46
3 Masonry work................................ Birr 270,000
TOTAL A...... Birr 3,417,346.19
B. SUPER STRUCTURE
1 Concrete work............................. Birr 7,544,730.7
2 Walling......................................... Birr 2,015,548.8
3 Roofing......................................... Birr 868,320
4 Electromechanically works............. Birr 5,000,000.00
5 Metal work..................................... Birr 1,662,308
6 Steel Structure................................ Birr 2,404,200
7 Plastering and Pointing.................. Birr 3,085,768.76
8 Finishing.......................................... Birr 4,760,696
1 Painting............................................ Birr 406,527
0
1 Sanitary Installation………………… Birr 677,550
1
1 Electrical Installation…..…………… Birr 5,796,7
2
1 Site Work……………….. Birr 235,480
3
1 Glazing………………….. birr 3,836,664
4
Total B ……….............. Birr 38,294,509
Total A + B ................... Birr 41,711,855.88
VAT 15%........................ Birr 6,256,778
Total With VAT.............. Birr 47,968,634

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Appendix-3: Construction/ Improvement Cost of Property B
Table A 3 Detail Breakdown of As built BoQ of Property B

Grand Summary of As Built BoQ for B+G+5 Commercial building

A-SUB STRUCTURE
1 Excavation and earth work........... Birr 1,389,424.34
2 Concrete work................................ Birr 1,982,199.85
TOTAL A...... Birr 3,371,624.16
B. SUPER STRUCTURE
1 Concrete work............................. Birr 4,732,859.61
2 Walling......................................... Birr 996,437.4
3 Roofing and cladding..................................... Birr 2,659,287.73
4 Electromechanically works............. Birr 2,500,000
5 Aluminum work..................................... Birr 5,137,742.40
6 Metal work 218,089.20
7 Steel Structure................................ Birr 876,328.94
8 Plastering and Pointing.................. Birr 2,106,202.32
9 Finishing.......................................... Birr 1,840,487.00
10 Painting............................................ Birr 179,798.75
11 Sanitary Installation………………… Birr 447,096.01
12 Electrical Installation…..…………… Birr 4,597,131.00
13 Site Work……………….. Birr 202,800.00
14 Glazing………………….. birr 4,004,000.00
Total B ……….............. Birr 38,294,509
Total A + B ................... Birr 33,869,884.51
VAT 15%........................ Birr 5,080,482.68
Total With VAT.............. Birr 38,950,367.19

112
Appendix-4: Construction/ Improvement Cost of Property C
Table A 4 Detail Breakdown of Asbuilt BoQ of Property C

A-SUB STRUCTURE
1 Excavation and earth work................ Birr 359,740.79
2 Concrete work..................................... Birr 677,020.95
3 Masonry work.................................. Birr 20,336.25
TOTAL A........ Birr 1,057,097.99
B. SUPER STRUCTURE
1 Concrete work.................................... Birr 2,099,288.71
2 Walling................................................ Birr 400,900.35
3 Roofing................................................ Birr 84,352.45
4 Carpentry and Joinery....................... Birr 334,118.60
5 Metal work.......................................... Birr 524,570.00
6 Steel Structure.................................... Birr -
7 Plastering and Pointing................... Birr 736,682.94
8 Finishing............................................. Birr 400,743.45
10 Painting............................................. Birr 214,908.64
11 Sanitary Installation……………. Birr 558,767.80
12 Electrical Installation….………… Birr 2,049,478.25
13 Site Work………………………. Birr 86,370.42
14 Glazing………………………… birr 135,973.75
Total B ………......... Birr 7,626,155.35
Total A + B ................... Birr 8,683,253.34
VAT 15%................... Birr 1,302,488.00
Total With VAT................... Birr 9,985,741.34

113
Appendix-5: As Built BOQ of Property D
Table A 5 Detail Breakdown of Asbuilt BoQ of Property D

Summary of As built BoQ of B+G+M+6 Commercial building,

Location: Hawassa
A-SUB STRUCTURE
1 Excavation and earth work................ Birr 1,178,614.08
2 Concrete work.................................... Birr 8,350,278.00
3 Masonry work.................................. Birr 2,658,933.00
TOTAL A.......... Birr 12,187,825.08
B. SUPER STRUCTURE
1 Concrete work.................................... Birr 11,985,263.00
2 Walling................................................ Birr 7,047,233.00
3 Roofing................................................ Birr 1,258,354.00
4 Carpentry and Joinery....................... Birr 1,352,698.00
5 Aluminum work birr 6,528,350.00
6 Metal work.......................................... Birr 3,589,632.00
7 Steel Structure.................................... Birr -
8 Plastering and Pointing................... Birr 3,026,359.00
9 Finishing............................................. Birr 6,350,896.00
10 Painting............................................. Birr 643,688.50
11 Sanitary Installation……………. Birr 2,564,288.05
12 Electrical Installation….………… Birr 3,901,561.50
13 Site Work………………………. Birr 86,370.42
14 Glazing………………………… birr 3,325,265.00
Total B ………......... Birr 51,659,958.47
Total A + B ................... Birr 63,847,783.55
VAT 15%................... Birr 9,577,167.53
Total With VAT................... Birr 73,424,951.08

114
Appendix-6: Summary of as Built BoQ of property E.
Table A 6 Detail Breakdown of Asbuilt BoQ of Property E

As built BoQ for project 2B+G+11+ Service quarter

A-SUB STRUCTURE
1 Excavation and earth work...................... Birr 13,458,893
2 Concrete work........................................ Birr 18,358,458
3 Masonary work...................................... Birr 6,563,258
4, Water proofing………………………………… Birr 6,848,450.00
TOTAL A.......... Birr 45,229,059
B. SUPER STRUCTURE
1 Concrete work........................................ Birr 34,259,159
2 Walling and cladding............................... Birr 21,596,357
3 Roofing.................................................. Birr 3,258,569
4 Electromechanical works....................... Birr 6,000,000
5 Metal work............................................. Birr 5,258,159
6 Steel Structure........................................ Birr 5,385,561.8
7 Plastering and Pointing........................... Birr 9,256,351
8 Finishing................................................. Birr 19,125,247
9 Painting.................................................. Birr 3,569,152
10 Air conditioning and ventilation……………… 6,259,357
11 Sanitary Installation………………………………… Birr 16,259,364
12 Electrical Birr 13,359,269
Installation…..…………………………………
13 Site Work………………………………………… Birr 726,440
14 Glazing…………………………… birr 7,218,728.40
Total B ………......... Birr 151,531,714.20
Total A + B ................... Birr 196,760,773.20
VAT 15%................... Birr 29,514,115.98
Total With VAT................... Birr 226,274,889.18

115
Appendix-7: Summary of as Built BoQ of property F.
Table A 7 Detail Breakdown of Asbuilt BoQ of Property F

A-SUB STRUCTURE
1 Excavation and earth work................ Birr 62,597.60
2 Concrete work..................................... Birr 79,320.68
3 Masonry work.................................. Birr 47,080.00
TOTAL A.......... Birr 188,998.27
B. SUPER STRUCTURE
1 Concrete work.................................... Birr 69,461.54
2 Walling................................................ Birr 32,240.00
3 Roofing................................................ Birr 35,071.43
4 Carpentry and Joinery....................... Birr 30,632.76
5 Metal work.......................................... Birr 33,241.88
6 Steel Structure.................................... Birr -
7 Plastering and Pointing................... Birr 31,418.01
8 Finishing............................................. Birr 49,235.77
10 Painting............................................. Birr 17,531.40
11 Sanitary Installation……………. Birr 60,000.00
12 Electrical Installation….………… Birr 32,630.00
Total B ………......... Birr 391,462.79
Total A + B ................... Birr 580,461.06
VAT 15%................... Birr 87,069.16
Total With VAT................... Birr 667,530.22

116
Appendix-8: CBE - Location Value for Hawassa city
Table A 8 Details of CBE location Values for Hawassa city

117
Appendix-9: Building Condition Factor (Depreciation Deduction Factors)

118
Appendix-10: Questionnaires and Questionnaire Interviewee

Dear Sir/Madam:

First of all I would like to say thank you for taking time out of your busy day to answer
my questionnaires. Your input and information will give me an enormous help.

This is an individual research as part of my graduate studies, submitted to Hawassa

University; Institute of Technology; Faculty of Civil Engineering and built
environment; department of Civil Engineering in partial fulfillment of the requirement
for the degree of Master of Science in Construction Technology and Management. Thus
the specific objectives of the research are:

 To assess existing real property valuation methodologies of banks in Hawassa

city.
 To compare valuation methods used by banks with detail costing.
 To identify key problems deemed to be a cause of variation that arises in
building valuation undertaken by banks in Hawassa city.
 To recommends a common basis of valuation that minimizes the discrepancy on
a real property valuation in Hawassa.
This survey is aimed at collecting information about “Assessment of real property
valuation approaches and its accuracy in Hawassa city”. Thus, I would like to ask you to
complete the following questions to reflect your opinion as accurately as possible.

Your responses are voluntary and will be confidential. Responses will not be identified
by individual. All responses will be compiled together and analyzed as a group. Your
response is highly appreciated and an important contribution to develop guidelines and
recommendations on property valuation approaches used by Banks and government
valuators in Hawassa.

With Regards!

YasinYakob/Researcher

119
Contact Address:

If you have any question, you can contact me on:

 Phone: +251916556072

 Email: yasinyac2014@gmail.com

 Telegram Contact: +251916556072

Definition of terms:

Property: refers to the ownership of land and its man-made improvements attached to
land e.g. buildings

Property valuation: is the fair market value of the property as of the date of the taking,
determined by what a willing buyer and a willing seller would agree to, neither being
under any compulsion to act.

Accuracy is defined as the degree to which result of measurement, calculation or

specification confirms to correct value.

Questionnaires

Section - I: General demographic information:

1. Educational background:

A. PhD B. MSc. C. BSc.

D. Diploma E. Other

2. Year of Experience

A. Below 5 B. 5 - 10 C. 11 - 15

D.16 - 20 E. 21 - 25 F. Above 25

Section - II: Assessment of real property valuation approaches and its accuracy in
Hawassa city.
120
# To assess the existing real property valuation methodologies of banks and
government valuators in Hawassa city

3. If your answer is for #2, is yes , which Property valuation technique you are using?
(you can select more than one)

Metho Sales Investment Replacement cost Other

ds Comparison Method/Income method
Method capitalization Method D

(√ )

4. For what purpose you valuate properties? (You can select more than one)

a) For buying
b) For selling
c) compensation
d) For mortgage, security of loans
e) For assessment of tax
f) For rent purpose
g) For acquisition
h) For insurance purpose
i) Others(please, specify)_____________________________________

5. What is your methodology to reach to final result?

______________________________________________________________________
_______________________________________________________________

6. Does your organization have a guide line to valuate properties?

a) Yes b) no

7. If your answer is yes, for #6, what kind of guide line does your organization uses?

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 a) International
b) Nationally prepared
c) Particularly prepared by the organization

8. If answer of #4 is for loan, insurance, selling, buying, is the amount/result equals

with building value for given purpose? Yes/No

 To compare valuation methods used by banks and government valuations with

detail costing (contractor‟s method).
9. How many types of valuation methods you use to valuate a particular property?

a) One b) two c) more

10. Are you agree variation and valuation inaccuracy. Please specify level.
Measurement scale is as follows

1=Strongly Agree, 2=Agree, 3=Undecided, 4=Disagree and 5=Strongly Disagree

Source:

Measurement scale 1 2 3 4 5

Existence of variation

11. For properties in construction stage have you ever checked its result with detail
costing to construct that property/building? Yes/No

12. If your answer for #11 is yes, for #12 have you ever checked amount of variation. If
Yes please state your amount of variation________, and state your opinion of
acceptable accuracy level amount in percentage by the following measurement scale.

Accuracy level +/-5% +/-10% +/-15% +/-20% Above 20%

Valuators
opinion(please tick(√)

122
 To assess and identify the problems and difficulties deemed to be a cause of
variation that arises in building valuation undertaken by banks and
government valuators.

13. For question #13, given below measurement scales are given as follows: Give your
professional opinion.

5=Strongly Agree, 4=Agree, 3=Undecided, 2=Disagree and 1=Strongly Disagree

Property valuators
Reasons causes variation of property valuated from current Please tick (√ )on
market values of buildings. the box

5 4 3 2 1
insufficient Political stablity,peace

Lack of professional association, as well as capacity buildings

on training
Banks using per sq.m rates rather than detail breakdown of
items
No accurate market evidence (data).
Client pressure or influence.
Lack of well updated standard
Using methods that not fits with purpose of valuation
Characteristics of firms using general practice rather than
specialized scientific procedure.
Errors in survey.
Differences arising out of different methodologies.
Valuators level of experience
Insufficient depth of investigation.
Errors in procedure.
Lack of professional property valuer.
State if any ____________________________

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