INTRODUCTION TO REAL ESTATE

BY: NOOR HAZWANI BINTI ALIAS

Course Objectives
• Introduction of real estate
Module 1 • Land Characteristic
( Introduction) • Related definitions

• Definition of market value

Module 2 • Concept of value
(Concept of value) • Value, price and cost

• The Comparable or Sales Comparison Method

• The Income Capitalisation (Investment) Method
Module 3 • The Cost Method
(Valuation methods) • The Profit Method
• The Residual Method
 Module 1:Introduction
 What is real estate?
•Real estate is "Property consisting of land and the
Over the land buildings on it, along with its natural resources such as
crops, minerals, or water; immovable property of this
nature; an interest vested in this; (also) an item of real
On the land property; (more generally) buildings or housing in general.

Related definitions:
Under the land
1) Real estate- physical land and
Appurtenances affixed to the land
(structures)
2) Real Property – all interest, benefits
and right inherent in the ownership of real estate
-Bundle of right
3)Personal Property – moveable items not permanently
affixed to, or part of the real estate
Property
“50% of the names mentioned
on The Times Rich List made
their money through investing
in property.”
 Concept of Value

 What is valuation?
•defined as the art and/or science of
estimating values. (penilaian adalah
subjektif)

•provision of a written opinion as to

capital price or value, or rental price or
value

•Valuation is simply a model to try to

determine price
 DEFINITION OF
MARKET VALUE

“the estimated amount for which a

property should exchange on the date of
valuation between a willing buyer and
seller in arm-length transcation after
proper marketing wherein the parties had
each acted knowledgeably, prudently
and without compulsion”
Source: International Valuation Standard 2000, (London, 2000)

 
 Valuation
 Valuation is the technique of estimating and determining the fair price or
value of property.

 The purpose of valuation:

 Buying or selling property
 Compulsory acquisition
 Insurance, betterment charges and speculations
 Tax
 Mortgage
 Lease/rental
 etc
 Amount asked, offered, or paid for good or service. It is determined
PRICE by the seller after taking into consideration all factors which used
to produce goods & services eg: production cost

Is an economic concept referring to be the monetary relationship

VALUE between goods and services available for purchase and those who buy
and sell them.

The price paid for goods and services or the amount required to
COST create or produce the good or services.
Price Paid = Cost to the Buyer
Production Cost of capital
cost
e.g : e.g :
materials • Purchasing of landed property
• Purchasing of production
machineries
 
 Valuation methods (kaedah penilaian)
 The method changes depends on whether you are building, buying or
selling the property.
 There are five (5) common methods used in valuing property:
i. The Comparable or Sales Comparison Method: Used for most types of property
where there is good evidence of previous sales. Non-specialised property.
ii. The Income Capitalisation (Investment) Method: Used for most commercial (and
residential) property that is producing, or has the potential to produce, future cash
flows through the letting (renting) of the property. Non-specialised property.
iii. The Cost Approach also called the Contractor’s Method: Used for only those
properties not bought and sold on the market and for technical (accounts and statutory)
purposes only. Specialised property.
iv. The Residual (Development) Method: Used for properties ripe for redevelopment of
for bare land only. Determines the value of the asset undeveloped relative to the
potential sale price of the completed development. Non-specialised and specialised
property.
v. The Profits Method also called the Accounts Method: Used for trading properties
(other than normal shops) where evidence of rents is slight as they tend not to be held
as investments. The accounts method determines an appropriate rent, which is then
Valuation methods (kaedah penilaian)
1) The Comparable or Sales Comparison Method
 market sales of comparable properties selected must be for similar type of properties
 For each of the stated comparables, the minimum information required to be disclosed
are the identification of the comparable (usually by way of Lot number and or Title
Number), the date of the transaction, the consideration for the transaction, a brief
description of the property and the land area
 Other information regarding the comparable property that may be provided are analyses
in terms of value for the various differences between the comparable property and the
subject property
 The Valuer may consider relevant sale and purchase agreements, options, offers and bids
for the subject property being valued where such information is available to the Valuer in
the normal course of his professional work
 The Valuer shall have regard to and disclose any prior registered transaction of the
subject property, within two years of the valuation.
Valuation methods (kaedah penilaian)

2) The Income Capitalisation (Investment) Method

 The estimated gross income for the property must be established by reference to
prevailing rental values of similar properties. Such evidences must be shown in
the report. The Valuer is also required to indicate the sustainability or otherwise
of the rentals used in the valuation of the subject property
 Where the Valuer does not take into account the current rent passing he must
indicate his reasoning for not doing so
 Outgoings and other operating expenses used in arriving at the net income for
the property must be supported by evidences of such outgoings and expenses
for comparable properties or by data complied, verified, analysed and kept by
the Valuer.
 The rate(s) of capitalisation used in valuing the property should be supported by
such rates for comparable properties or by data compiled, verified, analysed and
kept by the Valuer.
Valuation methods (kaedah penilaian)

3) Profit Method
 Suitable for property that generate profit eg:cinema, hotels, theatres etc
 The net income found out by deducting gross income (all working expenses,
outgoings, interest on capital invested and etc). Then, the net profit will be
multiplied by the Years’s Purchase to get the capitalized value

4) Cost Method
 Consists of estimating the cost of building, depreciation in value to account for
age of the building
 Cost of building include: labour cost, materials, incidental cost etc
Valuation methods (kaedah penilaian)

5) Residual Method
 Used in case of the land has the building potential due to the development
activity on the land
 The estimated gross development value for the property must be established by
reference to prevailing sale values for similar properties. Such evidences must
be shown in the report
 Costs of development used in arriving at the net development value of the
property must be supported by evidences of such costs that are available for
comparable properties or by data compiled, verified, analysed and kept by the
Valuer
 The timing of the development, including the phasing of the development must
be supported by data compiled, verified, analysed and kept by the Valuer.
 Discount rates used in the valuation must be market derived and supported by
adequate reasoning -
Factor affecting the property value
• Macro economic environment
• Demographics
• Planning control
• Government policies
• infrastructure availability
• Building costs
• Location
• Microeconomic factors
• Development potential
• Supply and demand factors
Thank
you…………