These experts or chartered surveyors use the following five main methods for capital valuation & #8230;
The Investment Method:
This is the first and most common method of capital valuation that is applied in commercial property valuation. The method incorporates translating a property's income flow or rent into a suitable capital sum. In this case, the capital value of the commercial property is directly linked to its producing power of income. Therefore, Value = Rent * Years Purchase with the year purchase being the multiplier that translates rental income to capital sum.
For example, if rent is $200,000 and Years Purchase is 10, therefore
Value = Rent * YP (200,000*10) = 2,000,000.
The Comparison Method:
Being a method that applies to capital values, the comparison method that is also known as the comparative method of valuation is primarily used for residential property. The method is used for properties that are purchased for occupation purposes rather than investment purposes. Moreover, the direct assessment of capital values is usually utilized for valuing properties that are vacant. However, the realization of a fair comparison involves the careful evaluation of any difference between the capital values of properties and considering the pros and cons of every property ("An Introduction," n.d.). For example, to determine the value of a vacant farm house and land, the value of similar farm houses and land are used.
Value of this farm house and land = (Size of land*value per Hectare) + Farm house
= (400*8000) + 700000 = 3,900,000
The Costs Method:
This method works with the assumption that a prospective buyer would be ready to pay a similar amount as it would cost him/her to purchase the same property elsewhere. The value in this method that is also known as the contractor's method consists of the land value and the replacement cost of the building. Basically, the Value of Existing Property = Cost of Site + Cost of Building -- Depreciation Allowance. The cost of site is determined by the value per hectare, the cost of the building is currency multiplied by square meter and the depreciation value is the percentage of the construction cost.
Value of the property = Cost of Site +...
Examples include hotels and public houses that are difficult to value through the comparison method but easier through the earning capacity of the property. This method follows the following basic equation Net Profit = Gross Profit (Gross Earnings -- Purchases) -- Working Expenses (excluding rent). For example, the cost of a petrol filling station will be determined by the estimated petrol sales less the working expenses.
Petrol Station Value = Estimated Petrol Sales -- Working Expenses
= 2,300,000 -- 800,000 = 1,500,000
The Residual Method:
This method is also known as the development method because it's applied used in properties with the probability for development or redevelopment. These valuations are always made by people who buy properties that they believe would be more valuable if they were modernized or improved. The method follows the equation that Residual Value = Value of Completed Development -- Total Expenditure on Improvements. The total construction costs include the pre-construction expenses such as demolition, compensations, surveyors and contingencies as well as other costs like planning and building regulations.
Example, if the completed development cost is 40,000,000 and expenditure is 30,000,000
Residual value = 40,000,000 -- 30,000,000 = 10,000,000.
