ETM 414 (APPLIED VALUATION)

Dr. N. B. Udoekanem
Department of Estate Management and Valuation
Federal University of Technology, Minna, Nigeria
e-mail: namnsoudoekanem@futminna.edu.ng
Tel: +2348023741703
 The Nature of Property Valuation
 Valuation is the estimation of the worth of an
interest in property for a specific purpose at a
given period of time.
 There are two basic forms of Property
Valuation. These are:
(a) Rental Valuation
(b) Capital Valuation

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Rental Valuation
 Rental valuation is the determination of the
rental value of a property.
 Rental value or rent of a commercial property is
the amount that a prospective tenant is able
and willing to pay to occupy it.
 It is also the value of a real property on annual
basis.
 Rent may be viewed from the perspectives of
the landlord and the tenant. To the landlord,
rent is an income, but to the tenant, it is the
cost of occupation of the property.
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The full rental value of a commercial property can
be determined through any of the following
methods:
 By comparison with rent of similar properties
 By considering rent as a proportion of turnover
of the business for which the property is
occupied
 By relating rent to the cost of the property
 By reference to the rent presently being paid

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By comparison with rent of similar
properties
 The current rental value of a commercial
property can be determined by comparing the
rent paid to occupy similar commercial
properties in the locality where the subject
property is located.
 This is usually done by obtaining rental data on
commercial properties recently let in the
locality and then determining the expected
rental value of the subject property.
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Example 1
Determine the rental value of KUDOS plaza, an office
property located in the central business district of Abuja.
The rental values of 40 similar office properties in the
locality recently let to tenants are presented in the Table
below: Rent / (N) Frequency
7200 2
7500 6
8000 5
8500 6
9500 10
10000 9
10500 2
Total 40

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Solution
+ +……………+
Where E(X) = Expected rental value of the
property
= Probabilities
= Rental values of comparable properties in the
distribution
The calculation is presented in a Table as follows:

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 Rent / (RWF) Frequency Probability Expected Rent / (RWF)
7200 2 0.05 360
7500 6 0.15 1125
8000 5 0.125 1000
8500 6 0.15 1275
9500 10 0.25 2375
10000 9 0.225 2250
10500 2 0.05 525
∑ 40 1.000 8910

Rental value of KUDOS Plaza

= N 360 + 1125 + 1000 + 1275 + 2375 + 2250 + 525
= N 8910/ p.a
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Example 2
A shop property in Minna with a frontage of 7m and a
depth of 15m is vacant and available for letting. What is
the rental value of the property if a near-by shop
property with a frontage of 6m and a depth of 15m was
recently let for N 450,000 p.a?
Solution
Analysis of recent letting
6m X 15m @ N 450,000
= 90@ N 450,000
= N 5000 p.a

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Rental Valuation of shop property at Gikondo
7m X 15m@ N 5000
= 105 X N 5000
= N 525,000 p.a
Example 3
No. 12 Gaskiya street, Abuja is a ground floor
shop property with frontage of 6m and a depth
of 18m was recently let at its full rental value of N
460,000 p.a. Determine the rental value of No.13
Gaskiya street, a similar property with a frontage
of 5m and a depth of 20m.
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Solution
Analysis of recent letting (No. 12 Gaskiya street )

Rental Valuation of No. 13 Gaskiya street

p.a

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By considering rent as a proportion of
turnover of the business for which the
property is occupied
Because tenants view rent as the cost of occupation
of a property, the rental value of such property can be
determined as a proportion of the turnover or profit
made or expected to be made from the business for
which the property is occupied.
 Since turnover or profit differs from business to
business, turnover rent will also differ according to
the nature of business which the tenant
undertakes.
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Example 4
A shop property in Ikeja, Lagos is available for letting. A
tenant who presently occupies an adjacent shop is willing
to expand his business. He estimates that if he occupies
the vacant shop, he will make a profit of N 1.75m per
annum. Also, he is prepared to pay 25% of his profit in
rent. How much rent does the property command as a
proportion of his profit?
Solution
Estimated Profit N 1,750,000
Proportion of turnover taken as rent 0.25
Estimated rental value N 437,500 p.a

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 In practice, rent payable by the tenant may not be
determined entirely from the turnover or profit of the
business carried out in the property.
 Often times, a proportion of the market rent is taken as the
base rent and a proportion of the turnover (known as
turnover rent) is added to it to obtain the effective rent of
the property.
Example 5
A shop property in Minna is vacant and available for letting.
The market rent for a similar shop in the locality is N 350,000
p.a. It is estimated that N 1.3m will be earned as profit from
the business that a prospective tenant could do in the shop.
The tenant is willing to pay 15% of his profit as part of the rent
while the base rent is agreed at 80% of the market rent. What
is the effective rent for the shop?
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Solution

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By relating rent to the cost of the property
 This method of determining rental value is
appropriate when there is no rental evidence for
similar or comparable commercial properties in
the locality where the subject property is
located.
 The basis for this method is that the full rental
value of a property comprises return on the
value of land plus the return on the capital
outlay of the building. This is the same as the
sum of the annual values of the site and
improvements thereon.
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Example 6
Mr. Cleverguy recently purchased a building land in Kpagungu, Minna
for N 2.5m. He has built a commercial warehouse on the land. The
depreciated replacement cost of the building is N 4.6m. If the return
on the land and building are 10% and 12% respectively. What is the full
rental value of the property?
Solution

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By reference to the rent presently being paid
 The rack rental value of a commercial property
can be determined by reference to the rent
presently being paid by the tenant, particularly
when such rent is below the rack rental value.
 In using this method, due consideration must be
given to the terms of the lease such as the
duration of the lease, rent review frequency,
repairing obligations and lease incentives such
as rent free periods and premiums.

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Example 7
The rent currently being paid to occupy an office property in
Maitama, Abuja is N 9000/per annum. This rent was fixed 3 years
ago and is due for review now. The annual rental growth rate for
comparable office properties in the locality is 8%. What is the full
rental value of the property?
Solution

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Capital Valuation
 Capital valuation is the estimation of the exchange
price of an interest in real property.
 Also, it is the determination of the future financial
benefits derived from the ownership of a property
expressed in terms of their present value.
The basic methods of property valuation are:
 Direct comparison method
 Investment method
 Cost method
 Residual method
 Profits method

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Direct comparison method
 This method of valuation is based on the principle of
demand and supply.
 It involves the comparison of the subject property with
similar properties for which transactions have already
taken place for the purpose of obtaining market data
to determine the value of the subject property.
 The method also entails analysis of market
transactions to obtain data for use directly or indirectly
in the application of other methods of valuation. Such
data include all risks yield (initial yield), rent review
frequency, rental growth rate, rent free period and
replacement cost rate.
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 The Direct comparison method relies strongly
on market data and uses statistical techniques
for analysis of the data to arrive at the market
value of the subject property.
 The unit of comparison for offices, shops,
commercial warehouses and land for
commercial property development is per
square metre.
 The method is not suitable for commercial
property valuation when market data is either
inadequate or non-existent.

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Investment method
 This method of valuation is also known as the
income approach.
 It is suitable for valuation of properties with
income-earning potential.
 The method is based on the principle that the
value of a property to an investor depends on
the benefits which he expects to derive from
the property over a given period of time.
 There is a relationship between the net income
generated by a property and its capital value.
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 In practice, the capital value of a commercial property is
determined by discounting the future income flows to their
present values.
 The summation of the present or discounted values is the
market value of the property.
 The basic property investment valuation model is:

 The net income is obtained by deducting all outgoings from

the gross income of the property.
 Outgoings are expenses necessary to keep a property in a
state to command the rent. These expenses include repairs,
insurance, rates and rent payable to a superior landlord, etc.
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 The years’ purchase is the multiplier or
capitalisation factor required to convert the net
income of the property to its capital value.
 It is also the present value of RWF1 per annum.
Forms of the investment method of valuation
There two forms of the investment method of
valuation. These are:
 The traditional income capitalisation approach
or the all risks yield (ARY) approach
 Growth - explicit discounted cash flow(DCF)
technique
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The traditional income capitalisation approach
 This approach to property investment valuation
uses growth-implicit yield or all risks yield to
capitalise the net income generated by the
property.
 The rental growth prospect of the income flows
is implied in the yield.
 The major interests usually valued in
commercial investment properties are rack-
rented freehold, reversionary freehold and
leasehold interests.
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Valuation of rack-rented freeholds
 Rack-rented freeholds are fully let freehold
properties. That is, freehold properties that are
let at their full rental values or market rent.
Example 8
Value the freehold interest in an office property
located in the CBD of Kigali just let at its net rental
value of N 1.65m per annum. Similar properties in
the locality recently sold indicate an initial yield of
8%.

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Solution
Net Rental Value N 1,650,000
YP Perp@8% 12.5
Valuation N 20,625,000

Valuation of reversionary freeholds

Reversionary freeholds are freehold properties
with reversionary interest. The valuation is done
on term and reversion basis or hardcore and top
slice basis.

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Example 9
What is the capital value of a freehold shop
property let on a lease with 12 years unexpired at
N380,000 p.a. The full rental value of the property
is N465,000 p.a. Initial yield for comparable shop
properties in the locality is 7%.
Solution
Term and Reversion
Term Rent N 380,000
YP 12 yrs @7% 7.942686 N 3,018,220.68

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Reversion to FRV N 465,000
YP Perp @7% 14.285714
PV 12 yrs @7% 0.444012 N 2,949,508.23
Valuation N 5, 967, 728.91
Say N 5, 967, 720
The valuation can also be done on hardcore and top slice basis as
follows:
Core Rent N 380,000
YP Perp @7% 14.285714 N 5,428,571.32
Top Slice N 85,000
YP Perp @7% 14.285714
PV 12 yrs @7% 0.444012 N 539,157.42
Valuation N 5, 967, 728.74
Say N 5, 967, 720

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Valuation of leaseholds
 Leaseholds are properties with derivative or
determinate interest. They have terminable
income streams because the interest can last
only for a term of years.
 The income generated by a leasehold property is
called profit rent.
 Profit rent is the difference between rent
received and rent paid.
 A leasehold interest with zero profit rent has no
value.
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Example 10
Value the leasehold interest in the previous
example. Sinking fund rate is 3%.
Solution
Rent Received N 465,000
Rent Paid N 380,000
Profit Rent N 85,000
YP for 12yrs@8% &3% 6.646193
Valuation N 564,926.41
Say N 564,920
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Cost Method
 The cost method of valuation is based on the
principle of substitution which states that value will
tend to be set by the cost of acquiring a similarly
desirable substitute. It assumes that cost and value
are related.
 The method is appropriate for the valuation of
properties that are rarely sold or have little or no
general market demand.
 The cost method is a method of last resort and
should be used only when there is no market data
for the use of direct comparison and investment
methods.
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 The cost method should not be used for the
valuation of investment properties (i.e.
properties with income earning potential)
except such valuation is for insurance purpose.
 The method is suitable for the valuation of
purpose-built schools, libraries, hospitals,
museums, churches, mosques, community or
town halls, police stations and other properties
for which there is no market and are rarely
traded.

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The basic inputs of the cost method are:
 Replacement cost of the building
 Depreciation (to allow for age and obsolescence)
 Value of land (i.e. value of the site)
The replacement cost of the building is usually
determined by any or combination of the following
methods:
 Bill of quantities method (also called builder’s
detailed inventory method)
 Subcontractors method
 Unit-in-situ cost method
 Comparative market method
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 After the replacement cost of the building is
determined, the accrued depreciation should
be properly computed and deducted from it to
obtain the depreciated replacement cost (DRC).
 The depreciated replacement cost is the current
cost of replacing an asset with its modern
equivalent asset less deductions for physical
deterioration and all relevant forms of
obsolescence and optimisation (RICS, 2017).
 Thereafter, the value of land is added to the
depreciated replacement cost of the building to
obtain the capital value of the property.
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Example 11
Value a purpose-built school complex developed in
Gwagwalada, Abuja. The school is built on a plot of
land measuring 75m X 98m. The complex comprises
the following:
(a) A classroom block on ground floor only used for
the nursery section of the school and measuring
32m X 15.2m
(b) A storey building comprising classrooms, stores
and teachers’ offices used for the primary section
of the school and measuring 43m X 27m.

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Example 11 Contd.
(c) Another storey building with architectural
embellishments, measuring 36.5m X 14.2m, with semi-
circular projections on both ends of the building, both
having diameter of 14.2m, used for the junior secondary
section.
(d) Teachers’ quarters comprising 16. No. 2-bedroom
residential bungalows, each having a floor area of 385.4.
(e) A gate house measuring 7.2m X 3.6m
(f) A generator house measuring 8.9m X 4.1m
(g) A perimeter wall fence with good quality double-leaf
steel gate measuring 2864m.

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Example 11 Contd
The current comparative replacement cost rates
are as follows:
• Classroom block N 17,520/
• Storey building (primary) N 28,645/
• Storey building (junior sec.) N29,500/
• Residential bungalows N 10,050/
• Gate house N 9,400/
• Generator house N 5,300/
• Perimeter wall fence N 1,780/MR

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Example 11 Contd.
Comparable sites in the neighbourhood are
sold at a market value of N 2,655/. The
classroom block was completed 8 years ago
and other structures were completed 3 years
ago. In allowing for depreciation on the
buildings, use the straight line method. The
economic useful life of the buildings is
estimated to be 60 years.

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Solution
Valuation of School Complex
Classroom Block
Superficial Area of Building 486.4
Replacement cost of building@ N 17,520/ N8,521,728
Depreciation Factor 0.867
Depreciated Replacement Cost N 7,388,338.18

Storey Building (Primary Section)

Superficial Area of Building 2,322
Replacement cost of building@ N 28,645/ N66,513,690
Depreciation Factor 0.917
Depreciated Replacement Cost N 60,993,053.73

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Storey Building (Junior Secondary Section)
Superficial Area of Building 1,353.4
Replacement cost of building@ N 29,500/ N39,925,300
Depreciation Factor 0.917
Depreciated Replacement Cost N 36,611,500.1

Teachers’ Quarters
Superficial Area of 1 bungalow 385.4
Replacement cost of 1 bungalow@ N 10,050/ N3,873,270
Replacement cost of 16 bungalows N61,972,320
Depreciation Factor 0.95
Depreciated Replacement Cost N 58,873,704

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Gate House
Superficial Area of Building 25.92
Replacement cost @ N 9,400/ N243,648
Depreciation Factor 0.95
Depreciated Replacement Cost N 231,465.6
Generator House
Superficial Area of Building 36.49
Replacement cost @ N 5,300/ N193,397
Depreciation Factor 0.95
Depreciated Replacement Cost N 183,727.15
Perimeter Wall Fence
Length of fence 2864m
Replacement cost of fence @ N 1,780/MR N5,097,920
Depreciation Factor 0.95
Depreciated Replacement Cost N 4,843,024
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Summary of Values
N
Classroom Block 7,388,338.18
Storey Building (Primary Section) 60,993,053.73
Storey Building (Junior Secondary Section) 36,611,500.1
Teachers’ Quarters 58,873,704
Gate House 231,465.6
Generator House 183,727.15
Perimeter Wall Fence 4,843,024
DRC of all structures 169,124,812.8
Value of land 19,514,250
Capital value of property 188,639,062.8 (Say
188,639,000)

The value of the school complex on the basis of

replacement cost is N188,639,000
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Residual Method
 The residual method of valuation is based on the
principle that within any given socio-political and
economic environment, there is for every parcel of
land, highest and best use and that the highest possible
potential value of that site can only be realised by
developing the site to its highest and best use.
 It is required when there is an element of latent value
which can be released by the expenditure of money on
a property.
 The method can be used for the valuation of
commercial property with development or
redevelopment potential.
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The residual valuation model is:

Residual Value
Residual value is the value of the property in its
present condition. It is the value of the site and
building, where the building is to be improved or
demolished.

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Gross Development Value
 Gross development value is the capital value of the
developed or improved site.
 Where the development would be let on completion, the
GDV is determined by capitalizing the estimated net rental
value of the property using the yield of comparable rack-
rented property investments.
 Where the development would be sold on completion, the
GDV is the estimated sale price of the property.
Total Development Cost
This is the total cost incurred in the development or
improvement of the property. It comprises the actual building
cost, professional fees of project consultants, contingencies,
development finance cost, letting fees and developer’s profit.
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Example 12
Value a vacant site within the built-up commercial area
of Kaduna for which there is no market evidence of
recent sales of comparable sites. Planning permission
may be given by the development board only for office
development covering a gross area of 3,085, providing
a net office space of 2,685. Current construction cost
of similar office blocks including site preparation and
clearance are expected to average N 25000/. When
completed 3 years hence, the development will be
readily let at N 19500/ per annum net. The yield of
similar rack-rented office properties is .

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Other information on the development are:
(i) Architects, Engineers, Quantity Surveyors and
Valuers’ fees are at 12% on building cost.
(ii) Development contingencies are 5% on building
cost.
(iii) Development finance cost is at 18% on half of the
total building cost for the period of development.
(iv) Letting fee is at 10% on rent
(v) The developer has expressed satisfaction on profit
of 15% on gross development value.
(vi) Legal and acquisition costs on site purchase is at
4% of the value of site.
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Solution
Net Income N 52,357,500
(2685of office space @RWF19500/)
YP Perp@ 15.384615
Gross Development Value N 805,499,980
Less: Total Development Cost
(a) Office block
(3085@RWF 25000/) N 77,125,000
Add Prof. fees@12% N 9,255,000
Building Cost N 86,380,000
(b) Contingencies@5%
of building cost N 4,319,000
Total Building Cost N 90,699,000
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(c) Finance cost @18% for 3yrs
on half of total building cost
29,161,180
Building and Finance Costs N 119,860,180
(d) Letting fees@10% of rent N 5,235,750
Development Cost N 125,095,930
(e) Developer’s profit
@15% of GDV N 120,824,997
Total Development Cost N 245,920,927
Residual Value in 3 years’ time N 559,579,053
PV N 1 in 3yrs@18% 0.608631
Value of site +Acquisition cost N 340,577,159
Let x be the value of site
Acquisition cost = 4% of x = 0.04x
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x + 0.04x = N 340,577,159
X(1+0.04) = N 340,577,159
1.04x = N 340,577,159

Value of site = N 327,478,037.5

Say N 327,478,000

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 Profits Method
 This method of valuation is a combination of
accounting procedure and the investment method of
valuation.
 It is also called accounts method.
 The method is based on the principle that the
market value of a property built and used for certain
types of business depends on the profits derived
from the use of the property for that particular
business. Such business must enjoy some degree of
monopoly which may be legal or factual.
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 A legal monopoly occurs where some legal
control exists to prevent competition to the
property user from the users of other properties.
For example where a licence is required for the
pursuit of a particular trade.
 A factual monopoly arises where the monopoly is
due merely to facts of location and opportunity,
other than legal control.
 It is used in valuing hotels, restaurants, public
houses, amusement parks, cinema houses, race
courses, theatres, etc.

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Example 13
Value a licenced freehold hotel situated in a busy
commercial city in Nigeria. Information extracted from the
accounting books of the hotel for last year are as follows:

Receipts N
Bar and Restaurants 5,650,000
Hotel Rooms 7,480,000
Conference and Board Rooms 3,860,000
Stock
Consumable stock as at 1st Jan, 2020 N 2,420,000
Consumable stock as at 31st Dec, 2020N 1,050,000

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Purchases
Consumable stock N 2,200,000
Cleaning Materials 98,000
Expenses
Wages and Salary N 645,000
Depreciation on premises 480,000
Gas and Electricity 250,000
Laundry 84,000
Stationery, Postage and Telephone 102,500
Advertisements 62,200
Licence duty 24,800
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Expenses Contd.
Insurance (Building) N 75,620
Insurance (Content) 46,000
Bad debts 206,540
Accountant’s fees 88,650
Bank charges 21,500
Repairs to furniture 54,000
Repairs to building 126,780
Other Information
(1) The furniture and equipment are valued at
N 3,654,000 but are insured at N 4,020,000
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Other Information Contd.
(2) Cash float is taken at 4 weeks on purchases
(3) Interest on Tenant’s capital is 17%
(4)Tenant’s share of divisible balance is at 60%
(5) Outgoings are at 15% on gross rental value
(6) Yield on similar freehold properties is %.

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 Valuation of Hotel
Gross Receipts N 16,990,000
Less Purchases N2,298,000
Add decrease in stock N 1,370,000 3,668,000
Gross Profit N13,322,000
Less Working Expenses N
Wages and Salary 645,000
Gas and Electricity 250,000
Laundry 84,000
Stationery, Postage and
Telephone 102,500
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Advertisements N 62,200
Licence duty 24,800
Insurance (Content) 46,000
Bad debts 206,540
Accountant’s fees 88,650
Bank charges 21,500
Repairs to furniture 54,000 N1,585,190
Net Profit N11,736,810
Less interest on Tenant’s capital
Furniture and Equipment N 3,654,000
Stock 1,735,000
Cash Float 176,769
Tenant’s Capital N 5,565, 769
Interest @ 17% N 946,181
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Divisible Balance N 10,790,629
Less Tenant’s share @ 60% 6,474,377
Gross Rental Value N 4,316,252
Less Outgoings @15% 647,438
Net Rental Value N 3,668,814
YP Perp@% 11.764706
Capital value of hotel N 43,162,518
Say N 43,162,500

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