Webinar 3: Introduction to Property Valuations

Understanding the difference between Value, Price and Worth is a common question during an APC assessment, the professional qualification for surveyors. In this webinar, recorded on 20th March, Andri Rabetanety, a senior lecturer at Glion Higher Education for MSc in Hospitality, Real Estate and Finance and financial modelling trainer at Bayfield Training, explains how to distinguish between the three, as well as explaining the basic maths behind valuing a commercial property and some of the approaches used.

He explained there were many purposes of valuations – from inclusion in financial statements, valuing for banks or for secured lending or using it for fund reporting to calculate the share price of the funds.

Price, Value and Worth

Distinguishing between Price, Value and Worth is key, he said. “Price is the amount of money required to purchase the property. Value assumes a willing buyer and a willing seller in what we call an arm’s length, or orderly, transaction between market participants. The Worth is what a particular investor is willing to pay for the asset, taking into account their own individual operational and investment objectives.”

Three valuation methods

Rabetanety explained there were three main valuation methods. The first is the Market or Comparable Approach, based on comparison of the asset in question with similar assets for which you have price information available. “The important thing is you need to have something that is similar to the property that you are looking at: similar in characteristics, location etc.”

The second, the Income Approach, is based on the capitalisation or the discounting of predicted income to produce a Net Present Value.

The final approach, the Cost Approach, is based on the economic principle that the purchaser will pay no more than the cost to obtain the assets – whether they purchase or rebuild the asset.

The Income Approach

During the webinar Rabetanety went into further detail on the Income Approach and methods of calculation. In the Capitalisation Method he explained you first need to find the Property Yield of a comparable property. This is calculated by dividing the rent of the comparable property by the Purchase Price.

The resulting figure is the Yield which, as a percentage, represents not only the return but also indicates the level of risk. “The higher the yield the higher the risk,” he said. However, it is important to note whether a property is over or under rented.

He explained there were three types of yield – depending on the timing of the calculation with Initial Yield calculated at purchase, Running Yield throughout its operation and Exit Yield when the property is resold.

He explained further conventional valuation methods – including Term & Reversion and Bottom & Top Layer which splits the analysis into income prior to the first review or below the first rent review level (in the case of later valuations) and the rent after the rent review (or above the first rent review rent level). By splitting the income in this way, a different yield can be applied to each of the two income streams in each method used respectively.

Rabetanety went on to explain another type of yield, The Equivalent Yield. This summaries the incomes streams using just one yield figure.

“I need to find a mechanism for communicating the current level of return on the total commercial property investment, which is where the Equivalent Yield comes into play.”

Register now for the next webinar in the series: An Introduction to Real Estate Financial Modelling which will take place on 17 April at 11am GMT.

 

April 9th, 2019|