Modern Methods of Valuation

Eric Shapiro, David Mackmin, Gary Sams

• Éditeur: Estates Gazette
• Année: 2019
• ISBN:
  9781351382731
• Édition: 12
• Sujet: Negocios y empresa
• Sous-sujet: Valoración

The twelfth edition of this essential valuation textbook reflects the changes in the regulatory and statutory framework for property valuations that have occurred since 2013, as well as presenting the tried and tested principles and practices of real estate valuation.

The twelfth edition is up to date as of June 2018 with the latest regulations, statutes and case law, including the RICS Valuation – Global Standards 2017. Its comprehensive coverage of the legal, economic and technical aspects of valuation make this book a core text for most university and college real estate programmes, and it provides students and practitioners with current and relevant guidance on the preparation of valuations for statutory purposes.

Throughout the text, the author team of experienced valuers presents examples of the application of these principles to the everyday problems met in practice. This new edition continues to be of excellent value to both students and practitioners alike as it provides the reader with a clear understanding of the methods and techniques of valuation.

1 Principles of valuation

1. The role of the valuer

Those involved with real estate might need to know the value of land or land and buildings. They might require the services of a valuer to provide a valuation of real estate which is often referred to as property. Valuers might be instructed to advise:

• owners on the price or rent they should ask for their property;

• buyers on offer prices;

• tenants on the rent they should pay;

• mortgagees on the value of property for loan security;

• owners dispossessed under compulsory powers on their right to compensation; and

• business tenants on their rate liability or home owners on their council tax banding.

Most instructions require the valuer to provide an opinion of market value (MV) or market rent (MR), that is the capital sum which, at a point in time on specified terms and subject to any legal constraints or restrictions, might be paid for a particular interest in property; or the annual rent at which the property might be leased. MV and MR are defined in the International Valuation Standards (IVS) 2017, published by the International Valuation Standards Council (IVSC) and adopted by the Royal Institution of Chartered Surveyors (RICS) in RICS Valuation – Global Standards (the Red Book); both became effective on 1 July 2017. Extracts in the text are based on these two standards. Every effort has been made to ensure that these are correct but all readers must check the current Red Book when using or quoting from the Red Book and need to be aware that both are subject to review.

The services of a professionally qualified valuer with detailed knowledge of the property market are considered to be essential because:

1. the market for property is imperfect;

2. landed property is heterogeneous;

3. the legal interests therein are complex; and

4. the laws relating to landed property are complicated.

The purpose for which a valuation is required is important as the value of property is not necessarily the same for all purposes; for example, it will be different for local taxation and financial statements.

The special areas of the law relating to landed property are considered in later chapters and the varied interests that can exist in landed property are considered in Chapter 3.

2. The property market

The nature of landed property, the method of conducting transactions in it and the limited amount of public information relating to transactions all contribute to the imperfections of the market. Apart from possible differences in construction, each piece of landed property is unique by reason of location. The majority of transactions in the property market are conducted privately, and even when the results of the transactions are known they are not helpful in the absence of detailed information on matters such as the size and state of the buildings and the legal title. The degree of imperfection varies across the market and while first-class shop investments are relatively homogeneous, because shops in prime locations attract similar tenants, public houses in rural locations will be more heterogeneous due to variations in catchment area and trading potential.

The property market is not a single entity; there are a number of markets, which may be local, national or international. There are sectors and sub-sectors such as residential, agricultural, commercial and industrial; markets for occupation and markets for ownership either for owner occupation or for letting. The market for residential property for occupation is generally local but that for prime property investments is international. The market for development properties can be local, national or international. Small sites for the erection of a few houses will interest small local builders or developers but large sites for residential or commercial development will be of interest to larger organisations over a wider area. Buyers of property can be individuals, corporate bodies, funds of various types and can be national or international.

3. A definition of value

The RICS, the regulatory institution governing the conduct of Chartered Surveyors, publishes and regularly revises the Red Book standards. These cover the definitions of value that apply in different circumstances; the process of valuation and the monitoring and regulation of RICS members who prepare valuations. Members carrying out Red Book valuations will also be members of the RICS Valuer Registration Scheme (VRS); it is only in those cases where a valuer provides valuations solely within one or more of the exception areas listed below that registration is not needed. It is mandatory for all members of the RICS to comply with Professional Standard 1 (PS1), which applies IVS 102 section 10 General Principles (Compliance with IVS) and section 40 Compliance with Other Standards; recognises the International Ethics Standards (IES)¹ and the International Property Measurement Standards;² and specifies additional mandatory requirements for RICS members and covers matters relating to conduct and ethics including the key requirements in the RICS Rules of Conduct. If the valuation is required for the purpose of one of the following exceptions then VPS 1–5³ might be “unsuitable or inappropriate”: In brief these exceptions are:

• The advice is expressly in preparation for, or during the course of, negotiations or possible litigation.

• The member is performing a statutory function or has to comply with prescribed statutory or legal procedures.

• The valuation is provided solely for internal purposes.

• The valuation is provided in connection with certain agency or brokerage work.

• The member is acting or preparing to act as an expert witness.

(See PS 1 5.4 for full details of these exceptions.)

It is not appropriate to comment on all the definitions and procedures here but merely to provide a definition of value that will serve the present purpose; attention will be concentrated on MV. Concepts of social value, aesthetic value or other values are not appropriate to this book but it should be remembered that value can be considered from these points of view.

The MV of a particular interest in landed property is an opinion as to the amount of money that could be obtained for it on a particular day from persons able and willing to buy it; it is an estimate of the contract price at that time and under those market conditions. Value is not intrinsic but results from estimates made by able and willing buyers of the benefit or satisfaction to be derived from the ownership of a given interest in a property. In order to value an interest in property a valuer must be able to assess the benefits to potential buyers. What is valued is not the physical land or land and buildings but the legal interest which gives legal rights of use or enjoyment of the land or land and buildings. The IVS (IVS 104 paragraph 30.1) definition of MV adopted by the RICS is:

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing where the parties had each acted knowledgeably prudently and without compulsion.

(RICS VPS 4)

VPS 4 continues with a requirement that:

In applying market value, regard must also be had to the requirement that the valuation amount reflects the actual market state and circumstances as of the effective valuation date. The full conceptual framework for MV can be found at paragraph 30.2 of IVS 104.

The valuation date is “The date on which the opinion of value applies” (RICS Red Book Glossary).

Buyers are those who propose to tie up capital in land or in land and building; there are three main angles from which they could view the transaction:

1. For occupation having regard to the personal, social or commercial benefits to be derived from that occupation.

2. For long-term investment having regard to the income (annual rent) expressed as a yield (percentage return) on the capital invested.

3. For short-term gain or profit, buying and reselling after improvement or repackaging.

These motives are not mutually exclusive; a transaction might be entered into with more than one motive in mind. The price the buyer is prepared to pay will be influenced by the supply and the demand for that particular type of property at that given point in time. Supply and demand are discussed later in this chapter but it should be noted here that demand must be effective, in other words it must be backed by money so that the desire to own can be translated into the act of buying.

4. Value and valuation

Although the aim of the valuer is to provide an estimate or opinion of MV it should not be assumed that each valuer’s opinion will be the same. Different valuers could arrive at different opinions of value because they are making estimates and there is normally room, within limits, for differences of opinion. Under stable market conditions, because market prices result from estimates of value made by buyers and sellers on the basis of prices previously paid for other similar interests, the differences should be relatively small. In times when market conditions are not stable more serious differences may arise. Here the valuer’s estimate of value will be based on prices previously paid but buyers will adjust their bids to reflect market movements since the previous transaction took place. The correctness of the estimate will, therefore, depend on the valuer’s knowledge and understanding of the movements and their skill in quantifying the impact on market prices. In some conditions the level of certainty might be below that which would normally be expected. In these conditions the valuer is required to provide in the report “Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user” (VPS 3) (see section 9 below).

In any market at any time there may be a number of buyers and sellers all of whom will have their own views, desires and judgements on the value of the commodity in question. A market constitutes an amalgamation of buyers who will strike individual bargains so that a “market price” can only represent an average view of all these factors. Where the commodities are all different, as in the case of property, then the problem of arriving at this average will be much greater than when the commodities are all the same, as for example with company shares. In the case of statutory valuations in hypothetical market conditions, these differences of opinion as to value will become even more marked.

Valuation is a process governed in most cases in the UK by the requirements of the RICS Global Standards. The process, provided the valuer is satisfied as to his or her competence to value a specific interest in a specified property for a given purpose (PS 2), will begin with an agreement of the terms of engagement (VPS 1) and the basis of value (VPS 4) – MV, MR, investment value or worth, fair value. This is followed by consideration of requirements for specific applications such as loans and financial statements (VPGA 4); inspections⁴ and investigations (VPS 2), and the process ends with a written valuation report (VPS 3) (see section 9 below).

Valuation is defined by the RICS in the Red Book Glossary as:

An opinion of the value of an asset or liability on a stated basis at a specified date. Unless limitations are agreed in the terms of engagement this will be provided after an inspection, and any further enquiries that are appropriate having regard to the nature of the asset and the purpose of the valuation.

5. Demand, supply and price

The quantity of property bought will always equal the quantity sold regardless of price. This does not mean that price is unimportant. Demand and supply are, in fact, equated at a point in time by some level of price. At any given time, other things being equal, any increase in demand or decrease in supply will cause price to rise; conversely, any decrease in demand or increase in supply will cause price to fall. Therefore, whatever the given demand and supply, in a freely operating market, price will ration the supply and match it to the demand. But price has a wider role.

If, over a long period, price remains persistently high in relation to the cost of pr...