Property Valuation in an Economic Context - Term Paper Example

 Property Valuation in an Economic Context Introduction Property valuation is the process of valuing real property after carefully inspecting the building and other factors, which relate to the building. These factors include the condition of the property, its amenities, and the location of the property. These factors play a very important and crucial role in valuing the property. Either when valuing a property, which is a building in our situation, the building can be vacant or a tenant may occupy it at the time of evaluation. These two scenarios require different ways of approach in terms of the steps taken and the assumptions made during the evaluation process. The value, sought, is the property’s Market Value. In this paper, we are going to identify one building in England with a net floor area of 500S.Q to 2500S.Q. For the purpose of this paper, we will assume that one owner owns the building, we will estimate the rental value of the building and show the calculations involved. However, before estimating the rental value of the property, we will first describe the building, its location, and the amenities the building has to offer. We will use online database or rental agencies to come up with the estimated rental value of the property. After this, we will come up with two hypothetical scenarios regarding the building Wyatt (2008, pp.67). The first scenario is to assume the building is vacant and we have to prepare a freehold valuation of the property for purposes of acquisition. While doing this, we will explain the valuation basis, the steps undertaken to prepare the valuation and outline the type of information to include in the valuation report. In the second hypothetical scenario, we will assume the office building is left to a tenant with a good covenant strength of 8 years ago on a 10 year FRI lease at a rent which is now 125% of the ERV. We are assuming the lease will expire in two years time and the property is currently over-rented. Under these conditions, we will then calculate the market value of the property for loan security purposes Wyatt (2008, pp.67). The next task after this is to prepare a Discount Cash Flow to show the NPV of the current incomes and outgoings and NPV of the proposed lease. The proposed lease will incorporate a rent-free period, which produces higher NPV than the existing NPV. We will assume a discount rate of 8%. The steps involved will clearly show for each case. In the UK, the property market is slowing down at a very high rate. This might be in some cases being untrue but in most parts of the country, the prices are greatly falling. This means that a property valuation is important in the UK due to the depreciation of the property. This is because as time goes on the price of a property reduces and this will reduce the price. So to keep up with current market prices The Building Wittson Commercial Building offers approximately 45 SQ.M (516 SQ.FT.) plus a kitchen and WC. In addition, 4 offices on the 1st floor providing a further 39 SQ.M (410 SQ.FT.) basement storage and parking to the rear. The Net Internal floor area of the building is 86 SQ.M (905 SQ.FT.). This is the Net Internal Area of the building and does not include the compound, which surrounds the building from the outside. All this information is available in the building blue print. Description of the building The building has double opening glazed entrance doors, which lead to vestibule. The double entrance makes access to the premises efficient and easy. The building also has central ceiling lights which make the premises light full. The building has a generator which provides electricity in case of a power blackout Smith (2000, p.123). The building has a central heating radiator to provide heat when the building is cold. It has a doorway leading to the first floor offices and further door leading to the basement and the parking. The first retail area of the building has full height display windows to the front with a range of florescent strip ceiling lights. This area has central perimeter heating radiators, power points and a telephone point. It has a door, which leads to the next retail area which consists of obscure glass windows overlooking the other side of the premises with a wide range of halogen ceiling lights. Just like the first retail area, it has a central heating radiator with numerous power points and a door, which leads through to rear vestibule. This part of the building has the fire exit and doors providing access the offices via the staircase. The premise has four spacious offices. The four offices measure (4.8m by 3m), (2.9m by 2.8m), (3.9m by 2.9m) and (2.8m by 1.8m) respectively. This offices are spacious and in good condition. The offices are equipped with the relevant furniture, which is of good quality with an attractive design. The building also has a basement for storage purposes with enough space to store many things. The floor of the building seems well maintained and the walls are still clean though some parts of the ceiling will require repair and painting. The basement storage, measures (7m by 4.8m), with florescent strip ceiling lights on the ceiling. The walls of the building are made of brick, with extensive timber cladding to the rear elevation. It has pitched roofs that have an overall covering with slate, the flat roof is made of bitumen, felt-covered over a single storey elements. The window frames are of glazed shop front windows, with glazed door within a modern anodized metal frame, front elevation has two Gregorian style cant bay windows to the first floor and two dormer windows set into the roof, private accommodation benefits from PVC-U replacement windows. Although the property looks attractive and appears to be in good condition in the main, it is in good condition as seen from outside. A number of items require attention. There are damaged and missing timber claddings to the rear elevation. The roof somehow looks to be uneven and missing slates are notable. Parts of the rear felt covered flat roof exhibit signs of damage and this require replacement in the end. Generally, the flat roofs have a short lifespan, during which they will require regular maintenance prior to replacement. The building also has a rear vestibule with a fire exit and central ceiling lights. It also has doors, which provide access to the outside part of the building. Outside the building, there is hard standing which provides humble parking space for numerous vehicles Location of the building  The building is located at 135 Watson Street, which is next to Albion Road. Its location is strategic and it can attract investors. The surrounding environment is good and clean as there are no factories around or dumping site. The building is just next to the road and this makes it easily accessible to vehicles and persons. There are other commercial buildings near this building and therefore creating a friendly environment for business purposes since there is minimum noise and disturbances. Its location also offers humble security, which will make the commercial use of the building more profitable. After comparing the building with other related buildings from rental agencies such as Mobilla Real Estate and commercial property then calculating the estimate rental value of the building is possible. The estimated rental value for the building was $1600, 000. This is the open market rate that the building could be reasonably expected to attain given its particular characteristics, conditions of the offices, amenities, the competitive position of the building and its location. Calculating Rental pass is $ 160,000 Area of internal side is 85 SQ.M. Comparable in the main is 90 SQ.M. Current letting price $160,000p.a And has just be sold at $3,000,000 ERV > $150,000/90 =1767.78 p s m >1767.78*85 =$151181.3 Yield >renting/price 15% >A rent is the market price All risk yields is also known as initial risk Smith (2000, p.123). We use it to capitalize rent when valuing property. All risk yields is the initial income from the property divided by the capital value of or price of the property, all risk yield is arrived at from the open market rental value and open market capital value In general k                          Where k is, all yield risk The annual risk yield of the building was 2%. We show this by the below calculations:            K=3,000,000                   150,000 The assumptions that I took were that the open market price and the current market were not to change. This means that the building would not change any time soon. Another assumption is that if the market were falling then the yields would rise because they represent a greater proportion of the property’s capital price (rays remain constant, capital values tend to fluctuate). The last assumption is that if the market is rising, the yields are likely to fall because the annual rent figure accounts for a lower percentage of the capital value. Basis of valuation A property valuation report is a document that provides a detailed assessment of the condition of the actual condition of an entire property. The bases of valuation are within The Royal Institute of Chartered Surveyors’ when preparing the valuation; I had the principal regard to the profits method of valuation, together with analysis of comparable market information. Where necessary I will also consider the “build up” approach to valuation, taking into account the current condition and the actual value of the property Isaac (2012, p. 453). Because of the confidential basis on which much of my comparable information obtained and held it is not generally possible to include such sensitive in the report. The report would comprise the valuation, appraisal, comments, and projections as to the potential of the building concerned. The projections of business potential of the building  concerned over the next one year or other specified period named in the Report is based upon my own investigations and such sources and detailed in the report, and make several assumptions. The steps involved in making the report include the following; first, in the report I will define all the important terms used. The next thing is to clearly state and explain the purpose of the report, which in this case will be “The valuation of a free-hold building.” After that, I will describe the building as it is and mention that the report is not a survey of the building in question. In the report, I will give a general idea of the surrounding environment of the property’s exact location. I will explain in details the overall feed of the immediate neighborhood, the community and if it is located in a busy town, city or in a rural place. I can also add the different structures or businesses seen on the location. The other type of important information will include in the report is the full address of the building, the owners of the building and their telephone numbers, the municipality and the county where the building is located. The next thing is to include details of the structure. This includes a clear description of the structure, the number of offices, the total internal area, the number of floors, number of cars that can fit in the garage and other important details related to the structure of the building. I may also include any improvements or repairs done on the building or those needed on the property. The next thing is to indicate the boundaries and measurements of the building. Environmental matters surrounding the building will get indication on the report. This will include the site of the building, the geographical or geophysical position of the building Isaac (2012, p. 453). The last part of the report will comprise of the valuation of the building. The definitions of the valuation will include the market value and the market value of the building with assumptions On the portion of the market, I will provide the asset valuation, the stock valuation, equity valuation are even a company valuation. Some of the crucial details include here are the date of purchase of the building, the exact price when it was purchased or cost of construction, and tax details. In this part, I will be as detailed as possible in computing to provide results of very high accuracy. On the summary part of the report, I will include the valuation of the building based on previous details and computations that I did. This will give the person reading the report an overall idea of the condition of the building. In addition, how much it is worth Wyatt (2008). If the building is vacant and we want to let the office then the average estimated period for re-letting of the property is 100 percent vacant is approximately 28 months with outcomes ranging from 24 to 36 months. This will comprise rent-free periods deemed compulsory to let the property at the estimated rental level existing in the market at that particular time. The estimated market rental level is from $150,000 p.a. to $200,000 p.a. with a mean of $175,000 p.a. This market rental level is arrived at adding the two estimated market rental levels and dividing them by 2: Average market level =$150,000+$250,000 =$400000                                                              2 The spread between the minimum and maximum outcomes is therefore 15% of the mean, which is not actually surprising bearing in mind that the estimates were done after inspection of the property. The market value estimates of the total let property with the lease of 2 years vary from $6,300,000 and $7,500,000 with a mean of $6,950,000. This mean arrives after adding the two estimated market value price and dividing them by two Todaro (2006, pp.567). Average estimate market value price = $6,400,000+$7,400,000 =$6,950,000                                                                                      2 The resultant spread between the minimum and maximum outcomes is 16% of the mean, which in the actual sense is not significantly higher than spread in the market rental values. Most of the variance comes in the outcomes after the calculations made by the differences in the estimated rental values. We find this by comparing the gross yields, which vary from 7.1% to 7.8% with a mean of 7.5%. The spread between the minimum and maximum outcomes is significantly lower than it was in the case of the market rental values and market values. There seems to be a safe feeling in the appraisal community appropriate yield for a fully let property of this description with a legal lease of 2 years Wyatt (2008). Assuming the property owner and the tenant have requested a new lease for 15 years at the market rent and with a rent-free period, we can prepare a Discount Cash Flow to show the NPV of the current income and outgoings and the NPV of the proposed lease. The proposed lease will incorporate a rent-free period, which produces a higher NPV than the existing lease (Todaro 2006, p.567). We will assume the discount rate to be 8%    Rate 8%             Year NPER Current Cash Flow Future Value 1 15 2000 $2,837.19 2 14 4000 $9,158.87 3 13 6000 $11,590.85 4 12 8000 $16,321.47 5 11 10000 $18,430.32 6 10 12000 $22,989.05 7 9 14,000 $25,062.09 8 8 16000 $26,707.36 9 7 18000 $27,976.86 10 6 22000 $31,855.89 11 5 24000 $32,291.25 12 4 26000 $32,492.80 13 3 27000 $31,326.40 14 2 29000 $31,240.00 15 1 31000 $31,000.00 Todaro (2006).                 Conclusion After coming up with the estimated rental value of the building using the evidence from rental agencies in the area, it is clear that the rental value depends on the net floor area of a building, its amenities, and its location. The estimated rental value depends on the open market rent and the open market value of the comparable property. The comparable proper is the property which we have used its open market value and its open market rent in order to calculate the estimated rental market value of the building we identified. If the market value of the property is high then its estimated rental value is low. The data of the comparable property have similar characteristics to those of the property being valued (The subject property). Such data include sale price, rents, income and expenses, and market derived capitalization and the yield. Specific characteristics of the property and transactions are the main factors, which make the value of a property to vary with the values of other properties. Element of comparison include, but are not limited to, the following: purchasing terms, property rights conveyed, specifications of sale, market conditions at the time of valuation, location of the property, and physical and economical characteristics. A building can be either vacant or occupied at the time of valuation. These two conditions result to different estimation of the market price of the building. When a building is vacant and on freehold, then its estimated market price tends to be lower than in the case where the building occupied. When a building gets occupants, it means that the demand for the building is high and therefore it is obvious that the current market price of the building will be high. In general, there is no perfect method of assessing the value of a property. However, the methods used in property valuation provide guidelines to both the owner of the property and the occupier on how to estimate the rental value of the house. This helps the owners and clients to decide on how to estimate the approximate rental value and market value of the property. Therefore, it is very important for someone to have a property evaluation before selling or buying a property. This will prevent any chances of losses or illegal transaction with respect to the property in question. Property evaluation is generally the most efficient and appropriate way of determining the value of a property. Bibliography WYATT, P. (2008). Property Valuation in an Economic Context. Chichester, John Wiley & Sons. WYATT, P. (2007). Property valuation in an economic context. Oxford, Blackwell Pub. TODARO, M. P., & SMITH, S. C. (2006). Economic development. Boston, Pearson Addison Wesley. ISAAC, D. (2012). Property valuation principles. Basingstoke, Palgrave Macmillan. SMITH, G. V., & PARR, R. L. (2000). Valuation of intellectual property and intangible assets. New York, Wiley. AMERICAN INSTITUTE OF REAL ESTATE APPRAISERS. (1977). Readings in real property valuation principles. Cambridge, Mass, Ballinger Pub. Co. Read More