Market Valuations may be needed for the following reasons:
A well-motivated valuation report enables you, the client, to make sound decisions in your business or generally with regard to any of your asset matters.
MARKET RENTAL VALUATIONS
Market Rental Valuations are often required for:
Surprisingly, Rental Valuations are often neglected or ignored, particularly by tenants, even though the cumulative effect of an uninformed decision in respect of lease rental can be material over the lease period.
It is therefore important that appropriate advice is sought whenever uncertainty exists as to a so-called ‘market’ rental being discussed.
LAND AND BUILDINGS
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
The estimated amount for which a property or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
PLANT AND MACHINERY
Value of Plant and Machinery to the Business (VPMB)
An opinion of the price at which an interest in the plant and machinery utilised in a business would have been transferred as the date of valuation, assuming:
Market Value in Situ
The estimated amount for which an asset (as a whole in its working place) should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s‑length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
There are several approaches commonly encountered in Market Valuations in South Africa. Valuations based on comparable sales analysis are used, for example, in residential or land valuations, where recent sales transactions are analysed and the results applied, with or without adjustment, to the valuation of a particular property.
The valuation of commercial and industrial properties is often undertaken on an income capitalisation approach. In the case of an owner-occupier or vacant property, this would entail first estimating the likely rental that the property would realise if offered to let in the open market at valuation date. This figure is annualised and a deduction may then be made for property outgoings, usually the responsibility of a landlord, such as assessment rates/taxes, fire insurance premiums, external repairs and maintenance provisions and management/sundry expenses. The resultant hypothetical net income is then converted into the estimated capital or market value with the application of an appropriate capitalisation rate.
When there are existing leases, these are taken into account with adjustments being made, where necessary, to reflect aspects including the lease terms and comparative market rental levels. The sustainability of the income is very important, whether it is actual rent passing or hypothetical estimates applied to vacant space.
A third method used is the depreciated replacement cost (DRC) method which is usually applied to the valuation of specialised properties, where comparative transactional evidence is not available.
International Valuation Standards Gn. 8.3.1 sets out the definition of DRC as ‘the current cost of replacing an asset with its modern equivalent asset less deduction for physical deterioration and all relevant forms of obsolescence and optimisation.’
Simplistically, it involves first estimating the current replacement cost, as if new, of a modern equivalent structure to which depreciation factors are applied reflecting issues such as age, condition and obsolescence. The depreciated replacement cost would include a land value estimate.
The DRC is a method of Market Valuation often applied inappropriately and is to be treated cautiously as it can result in a significant over-valuation in certain cases.
All the methods have in common the application of a mix of both factual data and valuer opinion. Actual data would include floor areas of buildings or the level of assessment rates payable. Estimates of market rental levels and appropriate operating costs, certain depreciation levels or adjustments to be made to comparable sales information are more opinion based. It is this latter aspect that has given rise to the view that valuation is more of an art than a science.