Features

Valuer’s role in property investment

28 May 2012 - {{hitsCtrl.values.hits}}

Valuer is the master of property market and jack of all trades who deals with the pool of property investment. The task of a property valuer is to give advice on value in money term of an interest of landed property. Further he considers personal preferences of the investor such as Security of Capital, Security and regularity of income, Liquidity of Capital, Cost of Transfer (Stamp duty, Legal Charges) to choose the best investment among the alternatives.

In today’s investment atmosphere value, price, worth & market value etc words are very commonly used interchangeably. But actually they have slight differences in their meanings. Value does not always equal price. Price is a historical fact and on the other hand value is the estimate of a future price likely to be paid for an asset. The price shall be a product of various factors show as financial capability, special interest and is driven by special motivations of the buyer and the seller. Value is an estimate of a future price. Also value is of different types where one is “market value” which is commonly used.

Specific investor’s perceptions
On the other hand the market value is distinguished from the worth as “specific investor’s perceptions”. In fact worth is the value in use and it is the present worth of the future cash flows. However individual investor circumstances, shall lead to different perception of the worth. Thus within the investment market value shall be a many of worth where as one value. This is due to this fact that the arrival at the worth is explicit, reflection of individual investor risk and return assessment before they arrive at the investment decision. On the other hand in a perfect market where the investors have same requirement and expectations worth and value shall converge.

Price value and worth are the reflection of a market. Market in the sense the market where assets and liabilities are traded. The price paid for goods, assets and services is dependent on the number of buyers and sellers in the market on this relevant date and is fundamental to valuation based on the prices paid. Though sometimes market is all self contained however over a period of time shall be influenced by activities in other markets and the supply and demand shall interact to bring parity. Mostly the market is imperfect. Especially in Sri Lanka there is a lack of knowledge pertaining to the market as the market participants adjust to these imperfections causes disequilibrium, the valuer has to reflect relevant market in his valuation and not the price reached on the relevant date and not the price reached at the time of the equilibrium in the market.

Imperfect market
If the market is imperfect can there be any investments? YES. Though the investment market is imperfect in a particular country, there are various sources of investments are available in the market. They compare of shares in public quoted companies, government bonds (medium or long term), saving accounts and property. These are the vehicles of investments available in the market. The valuer’s task is to draw up the best investment based on return. Return on equity the interest or the yield finds the link between property and other investments, and influences the investment decision. Therefore the valuer studies the relative advantages and disadvantages of the landed property in relation to the yield from government stock and the price/ earnings ratio with regard to shares. Income from the government stock and property companies of the rent and yield and the capital appreciation on maturity, where as in share dividends depends on the performance of the equity, is volatile and in bad times of bankruptcy, shall lose the capital investment.

Considering alternative investment
These are income based factors among other things contribute to the investment decision making. The criteria mentioned above can be of general application on the financial viability and property based investment require addressing legal, town planning, environmental & different other subjects, disciplines & aspects in additions to systematic risk and specific risks in particular. That means the valuer consider all these facts with alternative investments when selecting the ideal investment. Therefore the responsibility of a valuer in a land development project is to assess the value of the completed project and provide the investor enough information to make his decision based on analysis of comparable investments. This analysis entails providing cost ceiling for development and also the land acquisition.

In conclusion valuer’s role begins from pre acquisition of land to carry out market analysis of supply and demand effect of planning regulation, estimate the cost of acquisition, justify the return on investment and the viability of the project by caring out a valuation of the notional development after considering all the informational factors to justify the development as against other forms of investments.

In final analysis it is indispensable for the valuer’s to draw up a feasibility report on a development scheme for investment. So the valuer today is capable of providing much more professional advice than a “financial analyst” would, that is the valuer can perform the role of a real estate consultant. That is why it is generally accepted that a valuer is a jack of all trades. The valuer is more capable than other professionals in bringing informed opinions and real “feel” of the market, based on years of training and experience. Therefore, the role of the valuer needs to be increased in property investments rather than diminished.

The writer is a final year student(2007/2008) of the Department of Estate Management and Valuation- University of Sri Jayewardenepura

Features

Valuer’s role in property investment

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