Tag Archive for: normalised net income

Specialised Property Valuation Methodology (2021)

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.