Specialised Property Valuation Methodology (2021)

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Specialised Property Valuation Methodology (2021)

As recommended by the International Valuation Standards Council (IVSC) We will make use of two valuation approaches:

  • The main approach will be the Market Capitalisation Approach where we will survey the local property market for rental and expense information which will then adjust for the Subject Property. The net normalised income based on the adjusted market income and expenses will then be capitalised by a market capitalisation rate, which will be calculated from sales of industrial and commercial properties in the immediate area and adjusted for the subject property.
  • The second approach, which will be a “control” valuation method, will be based on the Profits Method which is more suitable for Specialised improved properties such as Grain Silos and Cold storage facilities, etc. This method focuses on the type of business operated from the property and then determines a hypothetical rent which the business could manage to pay as if the business rents the property. The net hypothetical income based on the “rent affordable” will then be capitalised by a market capitalisation rate which will be calculated from sales of industrial and commercial properties etc.

The two methods should produce a value range for the property with the “On-Target” market value to be determined based on factors such as market demand, location, condition of the improvements, etc.

The Profits valuation model assumes that the property is rented and therefore all property expenses and income are to be excluded for the calculation of the EBITDA. The “EBITDA” is basically the Net Income, before the deductions such as interest, taxes, depreciation, and amortization. The normalised “EBITDA” is then split into the entrepreneurial portion and the affordable rental portion. The rental payable less the property expenses equate into the net rental income, which is then capitalised to display a market-related value for the property. It is suggested that profits method encompass a 5 year period, two years in arrears, the current year and two years projected into the future.  The present value of these cash flows is then considered as the normalised net income, for valuation purposes.

 

The Valuation of Specialised Agricultural Farms;

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The market has different buyers with varying risk appetites. The mega farmers base their purchase of agricultural land on the ever so popular “ROI” return on investment on the capital layout. This investment approach tends to be considerably lower than, than what the general buyers’ market demands.

To determine an arm’s length sale transaction, it is imperative that actual buyers and sellers be interviewed, for the following reasons:

Items found to be included in the purchase price are the take-over of existing operational debt, movable items, stock on hand and more. The other issue of concern is transferable water-rights, the valuer is to establish proof on the availability of the registered water capacity per land portion. 

When evaluating an operational farm, the plantings, and the future demand for such should not be uncertain. Last but not lease operational improvements such as cold storage, packaging, and cooling facilities which form a rather integral part of the operations can represent 20%-35% of the purchase price.

I believe agricultural valuations require a vast amount of research and that the face-value of information available in the general public domain can be misleading.

Although the Profits Valuation Method is considered second to the Comparable Sales valuation methodology, it offers a selective insight into the cost-effectiveness of the operational activities. A good farm being poorly managed versus an average farm being well managed determines the potential and future growth of such agricultural business. So, then a comprehensive valuation report should include the various land use values (plantings and water rights), building improvements and business analysis, based on the Income and Expense Statements.

Property Investment in South Africa

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The global financial turmoil and general bewildered political status in South Africa, have the effect on investors to slow down property investments and rather place their funds within the financial arena. It is a well-known fact that inflation and the devaluation of money units results into negative growth over periods of 5 years and longer. The secrets to property investments are to buy at the bottom-end of the market value and ensure that takers for these properties are on demand and in the increase, thus the future of the investment is financially determinable. Buy-to-Rent has proven to be a sustainable investment, with first-time tenants as takers. I am persuaded that a qualified property valuer, can operate objectively, as he has no vested interest in the transaction and neither does the market value of the property have any correlation to the valuation fee. Investors should place less weight on the lower/bargain valuation fees, when in need of a property professional, this can result in lesser quality work, which can turn-out to be costly, when making poor investment decisions. Quality market research takes time as and most of the time does require physical footwork. The same regardless attitude towards proper insurance advice, is found be an acceptable norm… why pay for an insurance assessor…it will never happen to me! For most people their immovable properties are a rather large proportion of the investment portfolio, for which we all have worked so hard to accumulate, so then WHY neglect the risk management component to your wealth? Added services:

Exclusive custom research reports on all types of property and the property markets;

Handle entire objection process on General Valuation Roll for Cape Town;

Consultation on all property matters;

Agricultural Business

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With the valuation of agricultural farm land, the value attributes on the farm is identified and then categorised and apportioned as to determine the monetary contribution towards the entire entity in order to derive at the market value. Read more

Plant and Machinery Valuations

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More notes on Plant and Machinery Valuations;

Machinery are often leased for the following reasons:

A lease is “the right to use” an asset rented for a period for predetermined production etc.

Specialised maintenance is more economical as per lease contract!

A lease offers a more predictable lifespan of a machine and further the renewal options and at the end of lease the options are to a greater extent.  Read more

Redevelopment of Property

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Redevelopment of Property:  One property or an entire suburb!

  • Timing
  • The rate of development

redevelopement-graph

Urban Land Economics 2004; Jack Harvey and Ernie Jowsey

As can be seen from the above graph is that with the acquisition, the use of the building for income generation takes priority. The land presents a secondary value apportionment. Let us assume that the economical lifespan of the building is 25 years, which is presented by the figure Z.

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In search of the correct applied valuation methodology

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In my valuation career, now more than 30 years, there has been an increasing shift from linear valuation methodologies to more judgement-based approaches. Although some of the fundamentals still hold true, it is possible to modify existing linear methods to account for non-linearity by incorporating professional judgement of the valuer. Read more

Movable and Immovable Assets

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This article provides a brief account of some definitions and terminology used in the property industry. The aim is to highlight the distinction between the terms movable and immovable assets (also referred to as property).

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Factors Influencing Investment in Immovable Property

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As you probably know, modern day real estate economies are cyclical and goes through cycles of suppressed market conditions, where property prices are relatively low, to expansionary conditions of unsustainable high levels. Holding an investment through an economic cycle and buying or selling at the appropriate time is the aim of most investors. However, apart from the general real estate economic cycles, there is also the property investment cycle or building life cycle. The two are not exactly the same but they are very close.

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The intricacies of valuing a retirement village

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The writer is fortunate to have access to accumulated information, having been in the industry for more than 30 years, and working with various stakeholders such as bankers, buyers, sellers, investors, brokers, researchers and many others. Given this accessibility to relevant and practical information, sensitised for confidentiality, some general guidelines and notes can be shared as to the valuation approach and methodology to be used in valuing the frail care, food and catering, and assisted living units within a retirement village. Read more