Financing Property Development - Become an expert at Land Valuation
3 years ago
A JV deal ground to a halt because the landlord and developer were unable to reach a consensus on the land value. The value of the land in reality in the financial element which the land owner is contributing to the deal. Therefore accurately determining the value of the land is a key factor to property developement. The simple solution could have been to hire an Estate valuer, but because negotiations were not firmed up, both parties did not want to incur cost engaging a professional.
An estimated value can guide discussions at this point. You could call an expert acquaintance for an estimate. What if you did not know any experts?
The determination of the value of any landed property is not the exclusive preserve of Estate Surveyors, and you don't have to be a genius to figure things out:
1. The value per square meter of two adjoining properties regardless of their similarities will differ if one has a registered title and the other does not.
2. The value of plot A and B of the same size are bound to differ if Plot A still has an unexpired lease term above 80 years while Plot B has a lease term that will expire in a few decades.
To determine the value of a property, the valuer needs to first understand why he is carrying out the valuation. Estate Surveyors term this “purpose of valuation” and it could be for any number of reason. Reasons could be for sales, lease, acquisition, development, insurance, mortgage, etc.
Once the purpose of valuation is established, it determines the basis of valuation, which in simple terms is the valuation concept best suited to the purpose.
Bases are broadly categorized as follows:
1. Bases that reflect the prices at which parties can reasonably agree to either acquire or dispose their property. In this scenario, we have value concepts such as Open Market Value, Forced Sale Value and Special Value.
2. Bases that reflect benefits derivable from owning landed property such as Value-in-Use and Investment Value.
3. Bases that are set in statute(s)
4. Auxiliary Bases
The first two bases outlined are the most relevant to Joint Venture deals.
Now the valuer can move on to the next step..............
OK.... Here is a quick recap so far
To estimate value of property:-
1. First you find out the purpose of valuation
2. This determines the basis of valuation. Our focus is on joint venture deals and the two relevant bases of valuation for JV are :-
a. Bases that reflect the prices at which parties can reasonably agree to either acquire or dispose their property.
b. Bases that reflect benefits derivable from owning landed property such as Value-in-Use and Investment Value.
Based on the information gathered, you need to select a method/model to deploy for the valuation.
The models commonly used are:-
Cost/Contractors Method: Used for specialised properties that are not readily available on the market. ·
Profits/Accounts Method: Used to determine the value of properties used for trading, but with very limited record of transaction on them, such properties as hotels and restaurants are valued using this technique.
Investment/Income Method: This method of valuation is best suited to income producing properties such as commercial or residential properties that produce cash flows in form of rents. It is used to realise an estimated capital value by capitalizing the income flow derivable from the property.
Comparison Method: This model is used in cases where there is ample evidence of previous transactions on similar properties. It is considered the most reliable and widely used method provided there is abundant evidence of recent transactions on comparable properties. The method considers market prices recently paid for comparable properties with adjustment made to reflect the peculiar conditions and utility of the property being valued.
Residual Method/Development Method: This method is adopted in the valuation of development properties, that is bare land or developed land with potential to be developed/redeveloped/renovated for a higher and better use. It helps determine the price of land relative to the cost of development and works on the premise that the value of a site in its present condition as far as a developer is concerned is equivalent to the value of the proposed project at completion (Gross Development Value) less all costs/expenses incurred to bring about the development and the developer’s profit.
This of course involves the estimation of total cost of development and value of the project at completion as well as making reasonable allowances for profit and contingency. Accuracy, therefore – and this is applicable to other methods discussed – depends largely on the good application of techniques and the knowledge/expertise of the valuer.
It should be noted that, apart from these approaches to valuation, a valuer’s intuition also comes to play in the valuation of property, a lot of assumptions are involved in the process, although there are reasonable ranges within which such assumption must be made.
Because our aim is to carry out a quick valuation estimate to guide a JV negotiation, the most appropriate method we recommend because it’s easy to execute is the comparison method. Thanks to various property platforms like www. www.nigeriapropertycentre.com and www.propertypro.ng it’s relatively easy to do a quick search for similar properties online to get an idea of how much they sell for. Just note that most of the prices listed on these sites are still discounted when they are actually sold. We have found that taking and average of the property prices and discounting by about 15-20% usually gives you a fair idea of value. With this knowledge, you can come up with an estimate for land value pending when a professional is engaged if negotiations are favourable.
In my opinion, the residual method/development method is a great way to value a property, particularly for Joint venture projects. The challenge is that it takes a bit more expertise and understanding to use this method. If you want me to dig deeper and send you a guide on this method, just reply this email.
I personally enjoyed sharing this. I hope it was informative and useful