Since the end of World War II, the property and construction industries have matured significantly and have been considered a safe investment. This boom in interest led to a growth in demand for properties to be valued to establish market value, and to be revalued to help investors with portfolio and asset management.
Why value commercial property?
Valuations are usually required for these purposes:
- Tax (e.g. capital gains or losses)
- Reinstatement costs for insurances
Who can value?
Valuation cannot and should not be regarded as an exact science, but rather as a complex art that uses a blend of specific methodology and personal assumptions.
A qualified Member of the Royal Institute of Chartered Surveyors (MRICS) should prepare valuations for commercial properties. (There is an introduction to the value of RICS qualifications in Michael Chidiac’s earlier blog post Valuing the new RICS Valuer Registration Scheme).
What valuation methods are used?
The RICS abides by internationally recognized procedures and guidelines encompassed in the “bible” of chartered surveyors called the Red Book. The 7th edition of the Red Book, released at the beginning of January 2014, states that valuers should always use two valuation methods from the five listed, which are:
- The Comparative Method
- The Investment Method
- The Residual Method
- The Profit Method
- The Cost Method
Despite this, two valuers applying the same methodologies could arrive at varying final figures, due to their different assumptions.
When to value?
There is no defined rule. The need for a valuation report may be dictated by a fund’s strategy or by requests from lending entities. A valuation might occur on a one-off basis, e.g. for acquisition or disposal purposes, whilst a regulated entity may require quarterly valuations to track current market value and subsequently compute Net Asset Value. A landlord could request a full valuation, i.e. with inspection of the premises, for the first year, and an update on the market value for the next two years, without an inspection of the demised premises. The latter valuation is called desktop valuation and is often used by property funds. The common practice is to change valuers every three years.
What to value?
A valuation report can be compared to the balance sheet of a company. It is a snapshot of the property’s market value at the time of instruction. That value could increase or decrease as per the market conditions after the assessment.
The valuer tries to consider current and upcoming market conditions and reasonably forecast any adverse events that could materially affect the market value of the property.
In the absence of market evidence for some properties with special or unique characteristics, e.g. a library, hospital or church, the valuer must use alternative methods based on the reinstatement costs.
Valuation work is not limited to existing buildings. A valuer may assess the value of a plot of land in order to suggest a gross development value. These properties are said to have latent value. The rationale is that the value of the property (site) in its current state must equal the value of the property in its developed or redeveloped state, minus the costs of development and finance and any profit margin required by the developer.
The value of the Valuation Report
The recent credit crunch has strengthened the need for investors, owners and owner-occupiers to receive accurate, documented valuation reports that rely on local expertise, independent acumen and thorough data, and which clearly explain the assumptions on which they are based.
In assessing market value, your vauer will look at the use which will maximize the value of your legal interest, e.g. through a redevelopment, refurbishment or permitted change of use, enabling you to maximize profits in case of disposal.
The valuer can help you assess the market value of your assets and evaluate their performance. Bear in mind that the market value of the property might differ from its worth to any individual investor. This is another reason why an independent, locally-based expert opinion is very useful.
A valuation report will also assist you to fine-tune your holding/disposal/acquisition strategy by anticipating market moves and identifying any opportunities that might arise, so that you can be fully informed before commitment.