BRIEF EXPLANATION ON 3 UNCOMMON METHODS OF VALUATION
Barrett Matthew PardeyProfessional Property Valuer & Appraiser & Director of Pardey - Luthuli International Valuation Services
Residual Method of Valuation
The Residual Method of Valuation is normally used for development land or projects. This approach entails estimating the gross development value of the development components and deducting therefrom the development costs to be incurred, i.e. preliminary expenses, statutory payments, earthworks, infrastructure and building construction costs, professional fees, contingencies, project management fees, marketing and legal fees, financing costs, developer’s profits and other costs (if any) to arrive at the residual value. This residual value appropriately discounted for the period of development and sale is deemed to be the present market value of the subject property. The gross development value is derived by comparing the development components of the subject property with similar properties that have been sold recently and those that are currently being offered for sale in the vicinity or other comparable localities. The characteristics, merits and demerits of these properties are noted and appropriate adjustments thereof are then made to arrive at the proposed selling prices of the development components. The development costs to be incurred are the actual or estimated costs, fees, etc which are likely to be incurred for the completion of the development components.
Profits Method of Valuation
The Profits Method of Valuation is used to determine the market value of properties with special licensing requirements. It entails the use of the trading accounts derived from the business operation of the subject property. The gross receipts are adjusted to cover payments for purchases and stocks to determine the gross profit. The operating expenses are then deducted therefrom to assess the net trading profit. This figure of net trading profit less the remunerative interest on the tenant’s capital is the divisible balance. A percentage of the divisible balance is deemed to be the estimated net annual rental value of the subject property. This estimated net annual income is then capitalized by an appropriate capitalization rate or Years’ Purchase figure to capitalize the income to the present Capital Value of the property.
Discounted Cash Flow Approach
This approach may be engaged to assess the Market Value of ongoing development projects with construction cost incurred and billed progress payments to the purchasers. In the Discounted Cash Flow Approach, the value of the subject property is determined by the streams of present as well as the anticipated amount of cash inflow that will be generated during the respective terms of the whole investment / development period, taking into account the anticipated inflation rate, and adjusting these cash flows to present value by deferring them for the period concerned at an appropriate discount rate. The various development costs, i.e. infrastructure and building construction costs, professional fees / management fees / disbursements, interest on finance, developer’s profits, contingencies and management costs are also estimated on a cash outflow basis and discounted to the present value. The difference between the two sets of figures is the estimated price which a prudent purchaser would be prepared to pay for the property.
