The term asset valuation covers a wide range of situations but essentially covers situations where there is not a transaction happening, no buyer, no seller and no deemed disposal for tax or other purposes.
A valuation of a property for asset valuation purposes may be needed for any of the following reasons:
- to determine the insurance rebuilding cost
- for the purposes of updating the value of buildings which are held as assets of a company
- to determine the value of assets held by a family trust
- to determine the asset value of a pension fund
Balance sheet valuations…. Asset and fund valuations essentially form part of the balance sheet value of a business and are a vital requirement for most commercial businesses and public sector bodies. To meet various legal obligations most companies and local authorities are obliged to re-value property assets on either a 3 or 5 yearly rolling programme. Under CIPFA rules, public sector organisations are also required to maintain a register of property assets and to represent these within their accounts.
Building held as assets by a company are often specifically adapted for the purpose and/or may have a limited market, therefore the Chartered Valuation Surveyor will need to consider the valuation method that is appropriate for the property being valued. Market valuations are usually carried out by reference to comparable transactions of similar properties but where comparable properties are few and far between. Where the property or buildings has a limited market, for example, a hospital or fire station the Valuer may take the depreciated replacement cost basis approach. Here the valuation assessment will look for the value new, typical lifespan and years of use left putting aside a sinking fund to replace the asset at the end of its lifespan.
Buildings in use…..
For buildings in use such as hotels where the value of the trade is to be assessed then a profits basis method would apply. The profits basis of valuation will look at the impact and expertise of the owners, margins achieved and whether these are better than average for the location before selecting the multiplier to put on the net profit (after the Valuer has made various adjustments to the accounts), see section on goodwill valuations.
Buildings with higher value than the current use……
Here the customer or the accounting policies will elect that the valuation is either to be carried out on an ‘existing use’ basis or on a ‘market value basis’.
Valuations based on the ‘existing use’
An ‘existing use basis’ will ignore other uses that could be more valuable and is not a market valuation of the property but a valuation for the building based on its current use.
‘Existing use’ vs ‘market value’
Where the basis of asset valuation is to be ‘market value’ then as this includes ‘hope value’ of an alternative use, subject to planning risk. Therefore if the property or land it sits on has a greater value redeveloped as something else then the Chartered Valuation Surveyor may select a residual valuation approach or comparative cleared site land value approach. The residual valuation approach looks to the market value of an alternate higher value use than the existing use and calls this the gross development value, then deducts the costs of redevelopment, finance, land acquisition, legal costs and profit to find the land value. See the page on ‘development appraisals.’
Portfolio valuations – usually require assets to be valued as investments
An investment valuation is the term used to refer to valuations of all classes of property which are held for investment purposes. In simple terms this means either assets that are not owner occupied (a house let out rather than lived in by the owner, or a commercial or mixed use property not used by the owner for his or her business purposes but let out).
When considering an investment valuation the Chartered Valuation Surveyor has to consider not only the value of comparable units vacant and to let, but also the yield, or investment multiplier that the investment market, private treaty deals and auction houses are achieving for the relevant property class. So the method is
Rent x Yield = Value
It is the Chartered Valuation Surveyor’s job to assess whether the passing rent is the market rent, and if not, to look at when the market rent can be realised. This will either be at the next rent review that restores the rent to market value or at the end of the lease when the property can be re-let at market value.
When choosing the yield to apply the Valuer will also need to consider the ‘covenant strength’ of the occupier to an investor and as a principle a ‘blue chip’ covenant such as a bank or plc will offer better surety of the rent being received than an independent trader.
* RICS – The Royal Institution of Chartered Surveyors (RICS) represents the property profession in 146 countries, and regulates its ‘Chartered’ members. All valuations are subject to the RICS International Valuation Standards otherwise known as the ‘Red Book’.