Valuation process matters

ValuationImage Credit: Supplied

In its simplest form valuation is the estimation of how much something is worth at a given point in time between a willing buyer and a willing seller. It can be for real property such as land or building, tangible assets such as plants and machinery or intangible assets such as patents, goodwill and trademarks. A business valuation process may comprise all these elements.

Most people get to know about valuation reports when applying for a mortgage. Generally, banks will arrange an independent assessment of a property’s value by an external valuer, to ensure it is worthy of secured finance. In such cases, the valuer is normally instructed directly by the bank.

A lending agency will normally assess the loan-to-value ratio as a percentage of either the purchase price or valuation, whichever is lower. The mortgage valuation is designed to mitigate the bank’s risk by providing an independent, unbiased opinion. It is noteworthy that a valuation is not a structural survey — while the surveyor should highlight in the report any issues that are of note or warrant further investigation by a suitable qualified professional (such as a building surveyor), they are not undertaking a building condition survey. Structural survey should be arranged separately by a suitably qualified professional.

Even if a purchaser is not using financing for a property purchase, it is still wise to get an independent valuation for transactional purposes, as a safety check against the agreed purchase price.

Financial reporting is another reason for which valuations are often required, as companies need to register the value of their assets on their balance sheets in the annual audit. This opinion is normally provided by a suitably qualified professional and is made in accordance with applicable financial reporting standards and regulations.

Valuation reports may also be required in other instances such as in the course of legal action, immigration application, taxation considerations or probate purposes.

The valuation process should include clearly written terms of engagement agreed at the outset between the valuer and the client. These should, at the very least, cover basic items such as:
•    Name of the client
•    Details of the property
•    Scope of work
•    Fees and the turnaround time for the report
•    Information required to undertake the report
•    Statements concerning previous professional involvements and conflicts of interest
•    Any other items of note

Valuation is analytical in nature and should be based on a rational approach with a clear methodology and justifiable inputs. The main methods of valuation employed in real estate reports are as follows:

Comparable Method: Generally used for single residential properties such as apartments and villas and for the simpler types of commercial properties such as office suites and retail units. In this approach, the valuer identifies how much similar properties are being exchanged for and adjusts for the subject property as appropriate.

Income Method: Suitable for income-producing assets such as multi-unit commercial properties with various tenants on individual leases. As such, the valuer capitalises current and future income streams (rents) that the subject property offers.

Profits Method: Employed for trading entities such as hotels. The valuer constructs a cash flow to identify trading profits from which the valuer extrapolates an opinion of value.

Residual Method: Suitable for vacant development land. This method involves the estimation of the gross development value (GDV) of a
proposed development and then subtracting all costs to arrive at an amount that could reasonably be considered for the purchase of the vacant undeveloped site.

Contractors Method (also known as Cost Method): Generally used only for assets that are rarely traded and for which the above methods are not applicable. This approach entails adding the value of the land to the construction cost of the buildings thereon.

The valuer must also carefully consider the most appropriate method(s) to apply in the report. Valuation is a professional occupation that requires relevant educational qualifications, appropriate expert status and accreditations and professional indemnity insurance.

There are several professional bodies around the world that represent valuers and appraisers. Professional associations should have high requirements for entry, clear regulatory and reporting standards, strict codes of conduct and ongoing courses of continued professional development (CPD) for their members to ensure they keep abreast of a changing world. The Royal Institution of Chartered Surveyors (Rics) is widely considered to be the global standard in this profession and issues a lengthy set of international valuation standards every couple of years known as The Red Book, which sets out the relevant measures that members have to adhere to in the course of valuation work.

Additionally, since March all Rics members undertaking valuation work in the UAE also now have to be Registered Valuers.

With regards to built property, the valuer will normally visit the property and take detailed inspection notes, measurements and photographs. The most appropriate method of valuation will then be identified before writing the report. The gathering of required facts and data will also begin and calculations made as required. For standard single residential apartments or villas, the process could be as short as a few days. For more complex commercial properties and development projects, the report could take several weeks to complete, depending on the scope of work.

Source: Declan King, Special to Property Weekly
Director and Group Head of Real Estate at Valustrat

Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.

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