B.COM Unit – 4 ( CORPORATE SOCIAL RESPONSIBILITY ( CSR ).pptx
Week 1 slides (2)
1. Areas covered
• Role of valuations and valuer
• Definitions of market value, price and worth
• Five methods of commercial property
valuation
– Applications
– Methodology
– Approach
3. Rationale
• What are valuations or appraisals?
• Why is there a demand for valuations?
• Why is there a (growing) demand for analysis
of worth or Investment Value?
4. Definitions
• Price - exchange value
• Value – exchange or use value
• Worth
– Individual
– Market
• Valuation - prediction of exchange price
5. Market Value
“The estimated amount for which a property should
exchange on the date of the valuation between a willing
buyer and a willing seller in an arm’s-length transaction
after property marketing wherein the parties has each
acted knowledgeably, prudently and without
compulsion”
6. Role of valuations
• Financial reporting and legal/statutory
requirements
• Lending
• Transaction related
• Performance measurement
• Insurance
7. Global definition of Investment Value
• The value of the property to a particular
investor, or class of investors, for identified
investment objectives.
8. Role of Investment Value calculations
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Buy/sell/hold decisions
Identifying over or underpricing
Choosing between competing assets
‘Customising’ investment analysis to specific
circumstances of the investor
9. Key Points
• Distinction between price and worth
• Valuers’ role has been concerned with price.
• Increasing demand for analysis of prices and
calculations of worth
• Market worth - based upon the assumption
that there is mis-pricing in the commercial
property market
10. The Five Methods of Valuation
• Applications - when are they used?
• Methodologies - how are they used?
• Limitations - what are the problems with using
them?
• NB - read recommended texts in conjunction
with the notes
• Will be further developed in Year 2
11. The five methods
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The investment or income method
The residual method
The comparison method
The contractors or cost method
The profits or accounts method
NB - they are not mutually exclusive
12. Comparison Approach
• Used for the rental valuation of many types of
commercial properties (in UK).
• Used for the valuation of residential property
(in UK).
• Often used as a ‘check’ on other methods.
• Globally - is most widely used for all types of
property.
• Arguably most valuation methods have strong
elements of comparison.
13. Methodology
• Market transactions (deals) provide evidence
of prevailing values.
• This evidence is then applied to the subject
property.
• Appropriate adjustments are made where
required.
• What does heterogeneity imply?
15. Residual approach
• Land - with development potential
• Buildings with redevelopment potential
• Incorporated into methods which require a
land valuation
16. Methodology
• Calculate value of development
• Calculate cost of development - including
profit as a cost
• Difference is the remainder that is available
for the purchase of land.
17. Limitations
• There is substantial uncertainty about the
level of costs and revenues
• Techniques commonly used have some
technical weaknesses
• However, these technical weaknesses may not
matter. Why?
18. Investment method
• Derived from mainstream finance.
• Focus on the income.
• Value of an asset reflects the present value of
future income flows.
• Used for commercial properties which
generate a rental income.
• Most important method.
19. Methodology
• A number of variants.
• Basic approach - apply a capitalisation rate to
income stream
• Rents are set in the lease or obtained from
market evidence
• Yields or capitalisation rates are obtained
from sales
• We’ll see that the cap rate or yield is really a
multiplier.
21. Contractors method
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No market
Specialist purpose built
Operational purposes
Unusual - one off
Insurance
US - a mainstream
method
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Examples
Oil refinery
Church
Library
Sports Centre
Fire station
Hospital
24. Profits Method
• Business and property are closely linked
• Hotels/PFS/Restaurants/Cinemas/Pubs
• Income payable is a function of the
profitability of the occupying business.
• Income is capitalised to give a capital value.
25. Methodology
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Rent = Gross Profit - (Net Profit + Tenant Allowance)
Gross Profit = Gross earnings less purchases
Net profit = Gross profit less operating expenses
Tenant Allowance = Tenant’s salary, interest on
tenants investment and risk allowance
• Capital value = Rent/ capitalisation rate
27. Key Points
• There is an important distinction between
price and worth
• A valuation is an attempt to estimate market
price
• A calculation of worth can be used to analyse
this price
• There are five methods of estimating price or
market value
