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Valuation for acquisition

As residential and commercial valuers we value most property classes including:

  • Retail
  • Offices
  • Industrial & Logistics
  • Leisure Properties
  • Residential
  • Land & Development Sites
  • Specialist Properties including: pubs, restaurants, care homes, GP surgeries, dentists, health centres and student accomodation.

Valuations for acquisition can cover many purposes:

  • To support a mortgage or bank loan application,
  • To assist a investment or pension fund decide whether a property is a suitable asset that will perform well for the fund,
  • To assist a cash buyer in deciding whether to proceed with a purchase,
  • To assist a residential leashold tenant who wants to buy a property from their landlord.

So, valuations to support a purchase can cover all types of acquisition whether bank funding is involved or not. Valuations for acquisition cover all types of purchase including purchases by family trusts, investment funds, homes for individuals to live in, second homes and investments for the novice landlord and the professional investor alike.

An asset valuation is the term used to describe a range of situations where the value of an asset needs to be established but in a situation where there is not an arm’s length open market transaction happening, ie, no buyer or seller or no deemed disposal for tax or other purposes.

Establishing the ‘market value’

This type of valuation essentially has to assess the ‘market value’ of the property against which a loan is to be advanced.

Typically market value is established by the ‘comparable’ or ‘investment basis’, the comparable basis seeks out evidence of other completed transactions and relies on the Valuation Surveyors expertise to adjust the comparable evidence to derive the correct valuation for the subject property.

Other methods of establishing the market value include the account method (For business valuations), the residual method (For Land & Development Valuations) and the depreciated replacement cost method (where there is a very limited market).

Investment valuations

The investment valuation basis is the term used to refer to valuations of all classes of property which are held for investment purposes. This is typically 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.

Choosing the yield

A yield is essentially an investment return, a little like the interest rate you would get from a bank or if you bought government gilts. For property, when choosing the yield to apply the Valuer will 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.

What is market value?

Acquisition valuations are carried out in accordance with the RICS* International Valuation Standards. Usually the Valuer’s instructions are to report the “market value” define market value as “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.”

Market value is a concept distinct from market price, which is “the price at which one can transact”, while market value is “the true underlying value” according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations must prevail.

Market value is also distinct from fair value in that fair value depends on the parties involved, while market value does not, the implications being that fair value requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction.

Valuations for re-mortgage

A re-mortgage valuation requires the Valuer to revalue an asset which is already charged to the relevant bank or mortgage lender. Usually the purpose of a re-mortgage valuation is to consider the effects of refurbishment or improvement works done to the property that might increase its value, typical examples might include a loft conversion, extension or significant re-fit.

Independence of the Valuer

Under the RICS* International Valuation Standards the Valuer, a qualified Chartered Valuation Surveyor, has to be independent of the parties and cannot carry out the valuation if he/she has a conflict of interest, i.e., he/she cannot act for both parties in a transaction.

* 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’.

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