PROPERTY VALUATION

lecturer N.T MASHINGAIDZE

The concept of value
 Assignment questions
• 1a.Identify five conventional methods of valuation and give a detailed
description of how each method is used to value properties.25marks
• b.Discuss the assertion that comparison is the cornerstone of valuation with
reference to any three valuation methods you are familiar with.25 marks
•  
• QUESTION 2:  
• A).Discuss the definition of open market value, explain each requirement
thereof and in your own words critically explain how non-compliance to any
requirement could result in the value to be considered a subjective value
rather than an objective value, which would cause the so determined value
to be considered not an open market value as per the definition.20 Marks
 Assignment questions
b). Name and explain the various aspects of
value. 15 marks.
c). What is the purpose of a valuation report
and what are the characteristics of a good
report?15 marks
 The concept of value
• The concept of value has three most important components namely:
• 1. the person with property must have its value or utility value to the owner or the user,
otherwise there will be no demand of it.coupled with this idea of utility are the assumptions
that properties such as land, resources, promises future flow of income and satisfactions and
that effective demand exists for these flows of products or services.
• 2. a second neccessary component is scarcity in supply.Regardless of its utility a product must
be scarce if it is to command a price othrwise it will be a free good.
• 3. to have economic value only a product must be appropriate , that is, it must be something
that can be passed and transfrable to one owner to another. Therefore value can be divided
into USE value and Market value, the latter commands a great advantages for practical
purposes because it provides a greater standards of measuring.
• Value is also affected by the potential use, therefore land values are not the reflection of
current use but also possible future use.
• Example: a farm output production cost and price will determine if however, it is thought
that farm land could be used for profitable purpose such as housing or industry then the land
value will increase. The rise in value occurred before the land is transferable into higher use.
 VALUATION DEFINITIONS
• Millington(1984) defines valuation as the art or science of estimating the value for a special
purpose of a particular interest in property at particular point in time taking into account all
the features of the property and considering all the undrlying economithe factors of the
market including the range of alternative investiments.
• The royal institute of chartered Surveyors defines market value as the best price at which an
interest in property might be reasonably sold by private treaty at the date of valuation
assuming the following:
• A) willing seller, willing buyer
• B)a reasonable period within which to negotiate the sell taking into account the nature of the
property and the state of economy(market).
• C) valuers will remain the same.
• D) the property will be freely exposed to the market
• E) No account is to be taken for additional bid by a purchaser.
• By the international asset valuers standards define market value as the estimated amount of
which an asset should charge at the date of valuation between a willing buyer and willing seller
in an arms length transactions after proper marketing where in the parties had each acted
knwoledging , prudently and compulsion.
 Reasons for Property Valuations
a. Valuation for sale
b. Valuation for purchase
c. Valuation for rental purpose
d. Mortgage valuation
e. Valuation for insurance
f. Valuation for accounts
g. Valuation for development or redevelopment
h. Statutory valuations
 Valuation for sale
• This is a valuation undertaken on behalf of a
potential willing seller.In making such a
valuation, the valuer should consider the likely
purchasers on the market at that time and the
alternative properties available for sale.in
effect the valuer is valuing for open market
and it is this value that must be arrived at.
 Valuation for Purchase
• In valuing for puchase, the valuer must take greater
cnsideration of the requirements of the
purchases.In such circumstances the finacial and
personal requirements of the purchaser should be
taken into account and on that basis, a value to the
purchaser should arive it could well be that the
purchasers value will be lower or higher than the
market value. The valuation is therefore subjective
in that it relates to an individual rather objective
where it relates to a general market.
 Mortgage Valuation
• A mortgage is a loan granted usually by building
societies or bank usually for purchasing or
improvement of a property. In Zimbabwe the
tittle deeds are endoresd by the Registrar of
deeds stating that property is subject to mortgage
bond. The owners tittle deeds are also held by the
building societies or financial institutions offering
the loan. The reason for this is that the loan is
secured by the financial institutions.
 Rental Valuation
• This is much the same as open market sale except that
consideration is made on the leasing of the property.
Leasing or renting the property is a form of hiring and
there would be a remuneration paid in the form of
rent.the rental value of the property is not only viewed
from the market itself but also from the terms of the
lease agreements. It is also important to note that
obligations on the part of the landlord from a crucial part
of any form of valuation. Like valuation for purchase. The
rental valuation for tenancy must be subject for
assessment.
 Valuation for Insurance
• Buildings are surely insured against risks, events or
hazards.in the event of a property is totally
destroyed by one of these hazards, the insurance
company will rebuild the property to its former
state , hence the total cost of rebuilding the
property must be insured against, thus valuation for
insurance purposes is undertaken on the basis of
assessing the cost of rebuilding the property during
the insurance period. As costs inevitably rise, there
should be re assessed on specific period.
 Valuation for accounts
• A company usually requires to see its value of assets
including property reflected in its accounts.
According to international standards of Accounts,
this is usually undertaken by a method known as
the Depreciation Replacement Value. the method
entails assessing the cost of rerbuilding the
property, deducting a certain amount of
depreciation and adding the open market value of
land as if it was not undeveloped. It should be
stressed that it is not a value.
Valuation for developemnt or redevelopment

• This is a particular form evaluation undertaken

whereby the total costs of development are
deducted from the total costs value of a
complete developemnt to leave the residue
that equates to the land development.
 Statutory Valuations
• These valuations are undertaken in terms of act of
parliament known as statutes. the method of
valuation and pararmeters that must be considered
are usually made down by that particular
statute.Examples include valuation for compulsory
land acquisation, statutory undertakers(housing
schemes, roads, water, electricity, statutory
undertakers), estate duty, valuation for
compensation , rating,state duty and capital gains
duty.
FACTORS AFFECTING PROPERTY VALUES
 International situations
• International situations influence property values for
example an ubsurge in economies such as usa,
europe,japan will have spinoff effects throughout the
world. Also trade relations between nations through
economic grouping like WB, WTO will also have a
bearing effect on property value, via interests rates or
costs of borrowing, terms and conditions. Moods of
optisims or depressions on the part of investors which
may be caused by political situation eg wars, trade
sanctions also have an impact on property value.
 National Situations(a countrys political and
economic environment)
• Governemnt policies on economic development through
their national dvelopment plans, regional development
plans influience prpoerty values. Governement legislation
and policies and trade and economic investment activities
also affect property values. If there are favourable they
positively affect the property values through the creation
of an enabling economic environment prosperity.central
bank directives to finacial landing institutions such as
building societies, banks, insurance companies with
regarding to interest rates will determine the cost of
borrowing.
 Geographical factors
• Latitude, topography, soil type, climate
conditions and other physical conditions can
have a bearing on valuing such properties such
as farms, hotels, leisure resources, agro based
industry, locations, landuse patterns,
suitability of certaion types of properties will
be determined by geography.
 The local area and location consideration
• The area in which a property is located is obviously a decisive factor in property value. If
for instance a property owner has a standard 3 bedroomed house with two bathrooms
situated in different surbaban areas of harare, the folowing factors will apply:
a. Exclusivity of the suburb.
b. Type of shopping facilities whether one has to travel long distances or the shops are
located within short distances.
c. The availability of public transport if the house is located in an area where people rely
on publicc transport arrangements.
d. The distances between the CBD and industrial areas.
e. Location of popular schools in relation to the area
f. Security in the area
g. Popularity of the area
h. There are many more factors affcting the general demand of housing in a n area. It is
just necessary for the property valuers to observe the facilities of the area, its
advantages and disadvantages of an area.
 Individual property characteristics
• There are a hosts of different factors that could affect the value of individuals preoperty
value:
a. Type of construction and architectural design
b. Appropriateness of construction to the use of he property
c. State repairs and mainatenace
d. An ancillary facilities the property may have,
e. Tenancy for the property
f. Distance from shops, city centre, industrial areas,
g. Access to property
h. Proximity to major roads,
i. Security,
j. Size of the stand,
k. Size of accomodation,
l. Age of the buildings,
m. soils
 PROPERTY INVESTMENT RISKS
• There are various forms of property risks, they
include the following:tenant risk, sector risk,
structural risk, legislation risk, taxation risk,
planning risk, legal risk.
 Tenant risks
• This refers to the chance that the tenant ocupy the
property will affect its returns by his actions. The
most serious concern of he investors will be the
cancelling voids.ie the possibility of the tenant
vacating the premises and paying no rent. Even
where long leases are signed by tenant, the
possibility of bankruptcy must be considered.
Tenancy may fail to perfom, repairing and insuring
an obligation in leases. They may cause physical
damage to the property.
 Sector Risks
• This refers to the chance that sectoral price
movements affect the subject investment.
Property sectoral risk be it residential,
commercial , industrial or agricultural
properties can be diversified away by
balancing property investment by type,
region, city, town o spreading investment
portifolio between and among various forms.
 Structural Risks
• This refers to the chance of high repair costs, high
mainatenace or refurbishment becoming necessary and
eventually rebuilding either through structural failure,
economic, or functional obsolescenes. The cost of building
materials and its construction impact of technology changes
and local demand on building designs as evidenced by changes
in achitectural plans and practises, maintrnace and repairs
costs all have a direct bearing on property values.it should be
remembered that, although a building maybe technologically
obsolescences and yet at the same time structurally sound, it
may not be adopted or modified to meet new technological
demands.
 Legislation risks
• This refer to the chance of changes in case law
and statutes which directly affects investment
returns. Indeed property investors are bound
to suffer if there is an introduction and
extension of rates Acts , Planning Acts, RTCP
Act eg the rental value of properties outside
the Acts will increase as protected tenancy
rates are artificaially depressed.
 Taxation risk
• This risk is related to legislation risk. The most
common type of taxes are capital gains,
income, stamp duty, local authority rates and
special levies, therefore there are various
forms of tax risk,develoment incentives such
as tax exemptions, partial or complete
developments take place in rural or depressed
areas, growth points, export processing zones.
 Planning risks
• This is the risk that the local or cenral government
intends what to do.planning policies impinge
negatively or positively upon property investments
values. Planning risks can be diversified by shifting
values if one planning permissions being granted
elsewher e. Moreover changes in local development
plans, town planning schemes, regeneartion of cities
or towns via guided planning, reclamation of lost
landI( eg derelict lands or buildings can also enhance
property values in the identified areas.
 Legal risks
• This refer to the chance that the tittle
ceritificate to an investment is unsatisfactory
as that it is discovered that a risk exists over
the subject land(easement, servitude rights,
restrictive covenants) which affects its value.
There are also other forms of risks eg a risk
that a rent review notice is missed or
coversely that a request for excessive rent is
not challenged in time by a tenant.
CONVECTIONAL METHODS OF VALUATION

• There are five convetional methods that are

used in the valuation process namely:
a. The comparison(comparative) method
b. Investment/ Capitalisation
c. Residual(Hypothetical)
d. Contractors(Post summation)
e. Profits(accounts)
 Comparison(comparative)method
• This method is the cornerstone of valuation. Used in valuation of residential
properties, prermises for rental purposes at all types of accomodation and on
the valuation of land and farms.
• It entails evaluation by diversifying comparing the subject property under
consideration , with similar properties which have been slod or rented out,
when using this method. A valuer should first survey and collect data on similar
part transactions, analyse the collected data, compare the analysis with the
subject property and then carryout the valuations of the subject property.
• It should be noted that the subject property and properties with previous
transactions should be similar properties situated in the same area(location)
and the transactions should have taken place in the recent part.
• NB if the properties are less comparable with the subject property, the
comparison also become less valued. When carrying out the comparison, the
value should forecast or adjust to the following:
 Comparison(comparative)method
a. Structural condition,
b. State of repairs and mainatenance(aesthetic quality),
c. Acomodation offered
d. Quality of fixtures or fittings size of the land (location,location,location)

Value using comparison method should ask self folowing questions on the comparable:
e. Are comparable properties similar to subject property being valued,
f. Are the property situated in the same locality,
g. Have the comparable properties been sold or rented out recently,
h. Was the transaction can open market sale or letting.

It should be noted that although the comparative method is cornerstne to proprty valuation,
it cant be used to value all types of property. There are other unique and specialised
properties for which no comparable evidence at recent transactions exists. Such
properties are valued on basis of other valuation methods.
 The investment method(Capitalisation
method)I
• This method is used to value properties normally held no
income producing investments. Its based on the principle
that rents and capital values are related to each other,
hence given the income produced by a property, its
capital value can be estimated. These basis of evaluation
in the investment method is thus rental value and the
type of property in question the investment method is
widely used in valuation of commercial and industrial
properties the basic format for investment method is in
two parts namely Valuation of the term and valuation of
the reversion
 Valuation of the term
The main components of the lease agreement are parties to the
agreement, description of the property, duration of the lease and
the commencing and expiring date and the rentals payable by the
tenant.This information is very critical in the valuation of the
unexpired term of the lease.the valuation is undertaken as
follows:
a. The annual gross rents payable is established fror the subject
property,
b. The annual outgoings if any are estimated for the following year
and deducted from the gross annual rent.
c. The resulting rent is capitalised using relevnt valuation multipliers
to gfive the value of the remaining term of the lease.
 Valuation of the Reversion
After expiry of the lease period, landlordsreview rentals to open
market levels. It is assumed that these rentals are the maximum the
landlord is likely to obtain at that paerticular point in time . When
valuing a reversion is thus carried out in the following manner:

a. The annual gross open market rates are estimated from comparable
evidence.
b. The annual outgoings if any are estimated for the following year and
deducted from the gross rate.
c. The resulting rentals is capitalised to the commencement of the
reversionary period.
d. The capitalised value is then discounted back to the date of valuation
 Valuation of the Reversion
Calculation of the final value of the property:
the resulting values from the term and reversion
are added to arrive at the estimated market
value of the property. In the investment
method, the valuer converts the net annual
value, ton capital value using the multiplier
known as the Years Pu
 Valuation of the Reversion
Rchase(The present Value of a $ per annum).this years purchase is derived from the rate from
the rate of interest which an investor decides he or she will require from a property ie the
yields he or she wishes to obtain. This yield reflect the quality of investment in comparison
with other property investments and investments generally. It should be noted that, the
investment method utilises the comparative method in obtaining information, hence the
argument that the comparative method is the cornerstone for property valuation. The
investment method was the compartive method on the following:
a. During the capitalisation of the income of the term and reversion, the years purchase
multiplier is compared with multipliers used in the assessment of the value of both
proprties recently sold and other forms of investment.
b. During the assessment of the estimated open value of the reversion, the rent is estimated
by comparison of rentals, recently achieved in the open market.
c. In discounting the capitalised value of the reversion, similar multipliers are used as that
when the net rents were capitalised. It can thus be observed in the investment method of
valuations, the valuer uses the comparative approach as the basic method with the
invedstment approach for the detailed analysis and the application of the data collected.
 Residual method of valuation
• The method is used in the valuation of land due for development or redevelopment where there is no
comparable transactions of similar sites. The procedure of evaluating using the procedure is that:
a. The valuer establishes the best form of development suitable for the size and estimates the value of
the completed development suitable for the site.
b. He or she then establishes the value of the completed development, after this stage the valuer
should estimate the total cost for the development which may include such items as follows:
I. The cost of site clearance
II. The arcdhitects fees
III. Site engineers fees
IV. Developers profit
V. Estate agency fees for either managing the development or selling it and proffessional fees
The value of the land is then established by deducting the total cost of development and the developers
profit from the estimated value of the completed development due to the value of land being
residue or sometimes left over after deduction, the method become known as the residual method
of valuation:
Procedure: (estimated open market+value of completed development)-(development
costs+development profi)= residual value of land, which will be X$-Y$=Z$ .see on paper
 Contractors Method(DRV)
• In property valuation, costs does not equal to value. This means the costs
incurred in constructing a building does not necessarily equal the value of
the subject property. It may be more or less depending on the market
situation. This means the costs incurred in constructing a building does not
necessarily equal the value of the property. However contractors method
uses the assumption that costs =value in that the cost of the site is added
together with the cost of the building to give the value of the land and
buildings as one unit. This method is used to value public buildings, such as
townhotels, schools, libraries and police stations. A notable feature of
these buildings is that they rarely change. The basic approach of the
contractors method is mathematically expressed as follows:
• Land Value(based on market values)$+Cost of building(Gross
Replacement costs)$-(Depreciation and Obsolescence allowance)$/value
of existing property(Depreciated Replacement Value)$.
 Profit Method
• This method is based on the asumption that values of some properties are related to the profits
realised from their use. It is used to value property where there is lack of comparison evidence and
the proprties have some degree of monopoly.lack of comparative evidence on recent transactions
make it difficult to use the investment and comparative methods of valuation. Properties valued
using this method including the following: hotels and mortels, public houses, petrol filling stations,
cinemas and theatres, beerhalls, tarvens, drive in cinemas and night clubs.all those properties are
specialist in their architectural business and they operate. If they would be sold , the business they
operate would also be included together with the building in the final transaction value.the basic
procedure of valuing using Profit method is to deduct the total cost of purchases of the business
from the gross receipts and to obtain the gross annual accounts.
• Formula: (Gross Earnings)$-Working Expenses(except rent)$
• Net Profit($): Part of the net profit which the business earns should be allocated to pay the tenant
for his work. A further allocation to cover his risks and entreprises and the final allocation to allow
interest on the capital injected into the business.the remaining some of money would be the rental
payable for the use of the premises. The remaining sum of money would be the rental payable.
• this rental is capitalised into a capital value using the capital at $ per annum at an appropriate
interest rates for a number of years. Or it will be capitalised for perpetuity thus the profit method
invites the investment method at the capitalisation stage.
 Valuation Mathematics
• The amount of 1$(is the basis of all other methods)
• Time Value of Money concepts and applications:time value of money
is basically meaning that.the concept of compound interest is the basis
of the time value of money. Or on interest ie the growth in the value of
investment from time to time reflects not only the interest earned on
the original principal amount but also on the interest earnings.
• Interest rates:is the required rate of return, discount rate or
opportunity costs.interest rates measure the time value of
money.equilibrium interest rates are the required rate of return for a
particular investment in that the market rate of return is the return
that investor and savers require to get them willing lender their
funds.interest rates are also reffered to as discount rates. They can
also be viewed as opportunity cost of current consumptions.
 Valuation Mathematics
• Time value of money applications frequently require,determining
the future value of an investments cash flows as a result of the
effects of compound interest. Computing future value involves
projecting the cash flows based on the basis of an appropriate
compound interest rates to the rest of investments life. In property
valuation , amount of 1$(A$1-future value).
• A$1:what are we calculating are multipliers or factors. The amount
of 1$ table or future value is the amount to which a current deposit
will grow overtime when it is placed in an account paying
compound interest. In other words the amount of 1$ will
accumulate if it earns a compound given rate of interest for a given
number of years.
YEAR AMOUNT ADD INTEREST EQUALS AMOUNT
AT @10% AT THE
PER END OF
ANNUM THE
YEAR
1 $1,00
example
+ 0,10 = $1,10

2 $1,10 + 0,11 = $1,21

3 $1,21 + 0,121 = $1,331

4 $1,331 + 0,1331 = $1,4641

5 $1,4641 + 0,14641 = $1,6105

 Calculation of multiplier
• Q. Calculate the $1 multiplier given a compound interest rate of
10% for five years.
A$1=(1+i) to the power n. where I =Interest rate, n = Period.

Q. calculate the future value of A$1 of $30bn investment at the

end of 10yrs if it earns an annual compound interest rate of 8%.
A$1=(1+0,08) to the power 10
=2,15892
$30bn x2,15892
=64,76774 to 5d.p
 Calculation of multiplier
Q. how much will $30bn accumulate to if its interest at 10% quartely(1/4) for 10 years.
Nb. Semi annual means 2 in property valuation
A$1=(1+i/m) to the power(mxn) exmple:(1+0,1) to the power ¼ =1,02313

A$1 table or multiplier:This table gives the basis for other valuation tables.it is based on
compound interest calculations.amount of $1 multiplier are always greater than unit
as each figure will represent the original capital plus compound interest earned. The
excess over unit represents total interest earned.
1,61051 means 1=principal and ,61051=interest earned.
Present value is the reciprocal

Q. Calcualte the amount an investor will get in 15 yrs if $5bn is invested today at the
following compound interest rates:9% compounded annually, 9% compounded semi
annually,9% per annum compounded quartely, 9% per annum compounded semi
annually.
PRESENT VALUE OF $1(discounting)
• The present value of $ gives a sum that needs to be
invested the at the present time at given rate of
interest inorder to accumulate 1$ at the end of a
given time. It is also defined as the present value of
the right to receive the sum of $ ata given time in
the future discounted at ……….
• The present value of 1$is concerned with how much
should be invested now with compound interest
which will accumulate to $1 after a given number of
years.