Real Estate (Property)

The valuation of Real Estate, or Property, is an intriguing exercise, and there are a number of ways to look at this.

Residential, Commercial and Industrial Property have different nuances and we need to consider the correct valuation approach, or mix of approaches, for each.

This is Land as well as as any Buildings & Structures that have been erected on this Land. To value Property, we first need to decide whether we own it or we are leasing it.

If we own the Property, we should be looking at Fair Value, and “IFRS 13: Fair Value” probably provides the best guidance, in terms of using either a Market Approach, an Income Approach, a Cost Approach, or a combination of all three. If we are leasing the Property, however, then “IFRS 16: Leases” is our guiding light – this is all about the present valuation of future lease payments, however.

By way of an example, let us assume that we own a portfolio of Properties, including a nice mix of Residential, Commercial (Offices, Hotels and Shopping Malls) and Industrial parcels. To determine the Fair Values of these different property types, we can look at different valuation approaches and the questions we should be asking ourselves:

1. Market Approach
How much were similar properties sold for?

This is probably the easiest and most popular approach for our Residential Properties, and we will start by searching for (recent) selling prices of similar properties. Because its unlikely that we will find exact matches, we will need to make some Subjective Adjustments for things like size, area and location. We may also be able to use this approach for our Commercial Properties and Industrial Properties.

2. Income Approach
What is the cash-generating ability of the Properties?

This approach will be ideal for our Commercial Properties because we should be able to predict the cash inflows and outflows connected to these Properties. Although we use a “DCF Valuation” approach, there is a much simpler “Capitalisation of Earnings” method which is more commonly used. Though we may not expect to generate any rental income from our Industrial Properties, we can still use this latter approach for this class of Property.

3. Cost Approach
How much would it cost to rebuild, or reconstruct, our Properties?

If our Properties were very recently bought or built, then this cost is probably the best measure of Fair Value. The problem, however, is that some time may since have elapsed, and we will be need to make some bold assumptions about Current Day Costs (materials, labour etc) to theoretically reconstruct the Property. Thought then also needs to be given to Functional Obsolescence (caused by improvements in technology) and Economic Obsolescence (limitations on the income-generating ability of the Property). The section on “Plant & Machinery” provides more details about this approach.

Please Contact us for more information on how we can assist you with any Propety queries that you may have.