Property valuation is the process of estimating the worth of a property. Owing to the heterogeneous character of real estate assets and the complexities involved in the determination of their value, this process is left to qualified professionals known as valuers. According to The Institution of Surveyors of Kenya (ISK), a valuer is a professional who deals with a special discipline of economics associated with estimating asset values.
Valuation involves a reflection of the subject property characteristics and the circumstances surrounding the exchange of the interest in the open market. The purpose of real estate valuation goes beyond predicting the price that the market would pay for the property. Property can be valued for a number of reasons that do not involve a purchase or sale; for mortgage, compulsory acquisition or tax reasons, for instance.
Value of real estate can be determined through various approaches. The most commonly used approaches are income approach, cost approach, and market approach.
The market approach involves comparing the subject property to recent transactions of similar properties in the market. The methods used are the comparable transaction method and the comparable listing method. The implementation of the comparable transaction method is in two phases– selection of several similar properties recently sold and valuation of the adjusted selling prices through consideration of distinguishing factors such as location, size of property, finishes, fixtures and fittings. Comparable listing method is applied where there are no recent transactions involving similar properties.
The income approach is used for income generating assets. It assumes that the value is equal to the present value of all future benefits and liabilities. The net operating income is capitalized at an appropriate rate to determine the value.
The cost approach is commonly applied where the property being valued is so specialized that properties of that nature are rarely sold on the open market, or if there is no rental income produced. The value of the property is hence estimated to be the cost of development or acquisition, with adjustments for depreciation and obsolescence.
The appropriate property valuation method adopted in a property valuation exercise is largely influenced by the amount of information available to the valuer, the use of the property, the purpose of the valuation exercise and the type of the property under consideration. No single valuation method can be adapted to all valuation problems and the valuer’s knowledge of the property market is necessary to estimate an accurate and reliable property valuation.
