Property Valuation

PROPERTY VALUATION The new edition of the popular ‘all-in-one’ textbook on the valuation and appraisal of property, offering a more international perspective on valuation practice Property Valuation provides a comprehensive examination of property valuation principles, methods, issues and applications of the valuation and appraisal of commercial and industrial property across investment, development and occupier markets. With a clear writing style, this easily accessible textbook presents valuation from the client perspective, offering balanced coverage of the theory and practice of single-asset pricing, risk and return issues. The updated third edition reflects significant developments that have occurred in valuation over the past several years, particularly the expanding internationalisation of the valuation profession and the growing interest in valuation practice in emerging economies. Greater emphasis is placed on international content and context, such as the challenges of real estate asset valuation in countries with developing market economies, to offer a more global view of valuation practice. Throughout this edition, chapters link the most recent academic research to practical applications, incorporate the latest professional guidelines and standards and address land and property taxation, compulsory acquisition of land, the valuation of non-market goods and services and key valuation challenges with a more international perspective. Addresses the key challenges faced by valuation professionals in a single, up-to-date volume Combines academic coverage of principles with practical coverage of valuation applications Incorporates consideration of non-market value, including countries where land is seldom sold yet has social and environmental value Contains a wealth of well-developed worked examples and classroom-proven teaching and learning devices Includes access to a companion website with supporting material for students and lecturers Property Valuation, Third Edition is an excellent textbook for advanced undergraduate and graduate courses including real estate finance, real estate economics, property surveying, valuation and land economics in the UK, Europe and North America. It is also a valuable resource for early-career practitioners preparing for professional competency assessments as well as those studying property valuation and appraisal in developing countries and emerging economies. Cover 1 Title Page 5 Copyright Page 6 Contents 7 Preface 13 About the Companion Website 17 Section A Valuation Principles 19 Chapter 1 Property Rights and Property Value 21 1.1 Property rights 21 1.1.1 Tenure 22 1.1.2 Property rights in England 24 1.2 Property value 26 1.2.1 Extent of property rights 27 1.2.2 Security of property rights 29 1.2.3 Physical and geographical characteristics 31 1.3 Property valuation 31 1.3.1 Market transactions 32 1.3.2 Investment decisions 33 1.3.3 Compensation 33 1.3.4 Land and property taxation 34 1.3.5 Accounting, lending and insurance 34 Note 36 References 36 Chapter 2 The Economics of Property Value 37 2.1 Introduction 37 2.2 Land as a resource 37 2.3 Supply and demand, markets and equilibrium price determination 39 2.4 The property market and price determination 40 2.4.1 The property market 40 2.4.2 Price determination in the land market 41 2.4.3 Price determination in the property (land and buildings) market 44 2.5 Location and land use 47 2.6 Economics of property development 54 2.6.1 Type and density of development 54 2.6.2 Timing of development 56 2.7 Non-market concepts of value 58 Notes 60 References 60 Chapter 3 Property Markets 63 3.1 Introduction 63 3.2 Property markets 64 3.2.1 Occupier market 65 3.2.2 Investment market 77 3.2.3 Development market 81 3.3 Property markets interaction 87 Note 90 References 90 Chapter 4 Valuation Mathematics 93 4.1 Introduction 93 4.2 The time value of money 94 4.3 Single-sum investments 95 4.4 Multi-period investments 96 4.4.1 Level annuities 96 4.4.2 From a level annuity to a growth annuity 100 4.5 Timing of receipts 101 4.6 Yields 102 4.7 Rates of return 103 Notes 108 References 109 Chapter 5 Valuation Process and Governance 119 5.1 Valuation process 119 5.1.1 Confirm instruction and agree terms of engagement 119 5.1.2 Inspect the property 121 5.1.3 Gather and analyse comparable evidence 122 5.1.4 Establish basis of value 124 5.1.5 Make assumptions and special assumptions as appropriate 127 5.1.6 Select valuation approach(es) and method(s) and undertake the valuation 128 5.1.7 Produce a valuation report 128 5.2 Valuation governance 130 5.2.1 Standards of conduct 131 5.2.2 Valuation process standards 133 5.2.3 International valuation standards (IVS) 133 5.2.4 National valuation standards 134 5.3 Valuation systems 135 5.3.1 Information systems 137 5.3.2 Valuation capacity 139 5.3.3 Professional valuers associations 140 5.4 Conclusion 143 Notes 144 References 145 Section B Valuation Approaches and Methods 147 Chapter 6 Market Approach 149 6.1 Introduction 149 6.2 The comparison method 150 6.2.1 Collect comparable evidence of market transactions 150 6.2.2 Identification of value-significant characteristics 152 6.2.3 Adjustment of value-significant characteristics 157 6.3 Hedonic regression method 168 6.3.1 Simple linear regression 169 6.3.2 Multiple linear regression 176 Notes 186 References 186 Chapter 7 Income Approach 191 7.1 Introduction 191 7.2 Income capitalisation method 192 7.2.1 Perpetual annuities (freeholds) 193 7.2.2 Annuities with a term certain (leaseholds) 197 7.3 Discounted cash-flow method 201 7.3.1 A discounted Cash-Flow valuation model 202 7.3.2 Perpetual annuities 208 7.3.3 Annuities with a term certain 211 7.4 Profits method 213 7.4.1 Method 214 Notes 222 References 222 Chapter 8 Cost Approach 253 8.1 Introduction 253 8.2 Replacement cost method 254 8.2.1 Replacement cost 254 8.2.2 Depreciation 255 8.2.3 Land value 258 8.2.4 Application of the replacement cost method 260 8.2.5 Issues arising from the application of the replacement cost method 261 8.3 Residual method 263 8.3.1 Basic residual technique 264 8.3.2 Basic residual profit appraisal 272 8.3.3 Discounted cash-flow technique 273 Notes 278 References 278 Section C Valuation Application 289 Chapter 9 Valuation of Investment Property 291 9.1 Introduction 291 9.2 Analysis of rents 292 9.2.1 Rental lease incentives 292 9.2.2 Capital lease incentives 295 9.2.3 ‘Surrendered’ leases 298 9.2.4 Repairs, insurance, and ground rents 299 9.2.5 Rent-review pattern 301 9.3 Analysis of yields 302 9.3.1 Equivalent yield 302 9.3.2 Weighted average unexpired lease term 303 9.4 Market valuation of investment property 303 9.4.1 Voids and break options 303 9.4.2 Statutory considerations 306 9.4.3 Over-rented properties 312 9.4.4 Turnover leases 314 9.4.5 Long lease investments 317 9.4.6 Synergistic value 317 9.5 Investment valuation of investment property 320 9.5.1 Inputs and assumptions 321 9.5.2 Investment valuation using a discounted cash flow 324 References 329 Notes 376 Chapter 10 Valuation of Development Property 377 10.1 Introduction 377 10.2 Market valuation of development property 377 10.2.1 Comparison method 379 10.2.2 Residual method 380 10.3 Investment valuation of development property 387 10.3.1 Estimating the investment value of development property 387 10.3.2 Financial appraisals of development property 390 References 399 Chapter 11 Valuations for Financial Statements and for Secured Lending 419 11.1 Valuing property for financial statements 419 11.1.1 Basis of reporting measurement 420 11.1.2 Property categorisation 421 11.1.3 Basis of value 423 11.1.4 Valuation 425 11.1.5 Other issues 429 11.1.6 Example valuations 431 11.2 Valuing property for secured lending purposes 433 11.2.1 Professional standards and guidance 434 11.2.2 Valuation methods for loan security valuations 438 11.2.3 Example valuation 438 11.2.4 Reinstatement cost assessment 442 Note 442 References 442 Chapter 12 Valuations for Land and Property Taxation 467 12.1 Introduction 467 12.2 A land tax or a land and property tax? 468 12.3 Types of land and property taxes 470 12.3.1 Occupation taxes 471 12.3.2 Transfer and wealth taxes 473 12.3.3 Betterment taxation 473 12.4 Land and property taxation in England and Wales 474 12.4.1 Occupation taxes 475 12.4.2 Transfer and wealth taxes 484 12.4.3 Betterment taxation in England 486 Notes 490 References 490 Chapter 13 Valuations for Expropriation 495 13.1 Introduction 495 13.2 Valuation for expropriation 496 13.2.1 Valuing property rights that are to be taken or extinguished 496 13.2.2 Valuing retained property rights 497 13.2.3 Valuing compensation for disturbance 497 13.2.4 Valuing customary and informal land for expropriation purposes 498 13.2.5 Expropriation and non-market value 499 13.3 Valuations for compulsory purchase and planning compensation in England 500 13.3.1 Legal background 500 13.3.2 Compensation for land2 taken (compulsorily acquired) 501 13.3.3 Identifying the planning position 504 13.3.4 Compensation for severance and injurious affection 505 13.3.5 Compensation for disturbance and other losses 509 13.4 Planning compensation in England 511 13.4.1 Revocation, modification and discontinuance orders 511 13.4.2 Purchase notices 511 13.4.3 Blight compensation 512 Notes 512 References 513 Chapter 14 Valuation Variance, Risk and Optionality 517 14.1 Introduction 517 14.2 Valuation accuracy and valuation variance 518 14.3 Analysing risk 520 14.3.1 Sensitivity analysis 521 14.3.2 Scenario modelling 522 14.3.3 Simulation 524 14.4 Flexibility and options 529 14.5 Uncertainty 531 References 533 Appendix: Land Uses and Valuation Methods 543 A.1 Agriculture and fisheries 543 A.2 Forests and woodland 543 A.3 Natural resource extraction – water, minerals and other materials 544 A.4 Recreation and leisure 544 A.5 Utilities and infrastructure 544 A.6 Residential 545 A.7 Community services 546 A.8 Land and buildings with (Re)development potential 546 Notes 546 References 546 Glossary 547 Index 551 EULA 559 "Real estate is an essential part of life, providing the buildings for living, working, learning and leisure activities. Non-domestic real estate is comprised of a huge range of buildings, including office, retail, industrial, leisure, medical and hotel properties. In the UK, the commercial real estate sector has a market value of around £1.7 trillion (2019 data) and is one of the fundamental building blocks of the UK economy, directly employing more than one million people and supporting an additional million, while also contributing over £100 billion to the UK's economy each year (about 7% of UK GVA). Worldwide, it is estimated that the value of commercial real estate is around $33.3 trillion, with the US ($8.1t), China ($3.6t), Japan ($2.8t), Germany ($1.7t) and the UK ($1.7t) being the largest markets (2017 data). China also accounts for the largest share of global residential value, thanks to national house price growth and a rapid programme of housebuilding. Emerging markets, especially in Asia, are also experiencing fast growth in both commercial and residential property value"-- Provided by publisher