School of Economics and Finance
Introduction to Valuation
School of Economics and Finance
• Valuation
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– The monetary worth of something, especially as estimated by a valuer
Oxford Dictionary
– Valuation by registered valuer, NZIV and PINZ
• Valuation Standards and Code of Ethics
School of Economics and Finance
Market Value (IVS General Standards, 2020)
Market Value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
School of Economics and Finance
Statutory Definitions of Value
• Rating value
• Capital value
• Land value
• Unimproved value
• Special rateable value • Annual value
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• Existing use value
• Limited use and special purpose properties • Investment value
• Going concern value
• Special value
• Insurable value
• Salvage value
• Liquidation value
• Fair value
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Range of Valuations
• marketpurposes
• mortgages
• rentingandleasing
• rentandleaserenewals
• determinationundercontract
• rateablevaluations(andobjections) • crown land sales
• crown land acquisitions
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Range of Valuations
• statutoryrentalvaluations
• curtilage valuations
• matrimonialdisputes
• companyassets
• portfolioaudits
• insurance
• financialcounseling
– (GST exemption)
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• Scarcity
Factors of Value
• Effective purchasing power
School of Economics and Finance
Massey-Side Finishing Farm, 559 Tennent Drive, Linton
Ruralfinishing, 106ha
Farms of this scale within 7km of the Palmerston North CBD rarely come to the market
Of the 106 hectares around 90 hectares is flat, balance hill and gully
Over 21.4km of Novaflo drainage has been installed since 2013
Just a couple of kilometres to and Fonterra Research Centre Centrally-laned for easy access
Excellent cattle yards with good off-road hardstand parking
The majority of the pasture has been renewed over the past five years
Used for beef production, barley crops and dairy heifer grazing
Carrying over 450 head of mixed age cattle
Town water supply reticulated to troughs
Attractive building sites and in this prime location it will be difficult to over- capitalise if considering a new home
Two titles – 1.5 ha and 104.5 ha
School of Economics and Finance
School of Economics and Finance
Sales Information
Bare farmland
1. 140 ha, dairy farm, superior soil, flat contour, 8kms from Palmerston North, $6,420,000 2/21
2. 27.5 ha, adjoins subject, bare land, flat contour $1,960,000, 8/20
3. 40 ha, superior soil type and flat contour, 8kms from Palmerston North, $2,250,000, 5/20
4. 192 ha, hill country, 10 kms from Palmerston North, $3,500,000 4/21
Bare lifestyle blocks in the locality are selling for around: $320,000 to $330,000 for 1.5 – 2 ha blocks
School of Economics and Finance
Group 1. Group 2.
Group 3. Group 4.
Mr Jones – Valuer
Mr and Mrs Gumboot – Adjoining dairy farmer, well established with 400 cow herd
Mr and Mrs Woolly – Retiring sheep and beef farmer, just sold farm for $8,500,000, no debt
Mr and Ms Developer – Looking to landbank for future lifestyle development.
School of Economics and Finance
Valuers Role
• To simulate an auction
– subjective opinions
– sale is objective opinion
• To determine an objective (fair) market value – (IVS definition of market value)
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Spencer v The Commonwealth [1907] 5, C.L.R., 418
To arrive at the value of land at that date, it is not by means of a forced sale, but voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. – Goes on to say both parties were informed.
School of Economics and Finance
Concepts of Value
• principle of willing buyer, willing seller
• “most probable selling price”
R. Ratcliffe
• highest and best use
• “The use which at the time can generally be described as the most profitable”
• attaches to the land
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Three Main Valuation Approaches
• sales comparison approach
• replacement cost (summation) approach • income approach
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Introduction to market based valuation approaches
• Sales Comparison
• Replacement Cost
• Income Approach
Reconcile the indications derived from appropriate valuation methods
Refer to IVS 105
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Sales Comparison Approach
• Based on substitution principle
• The buyers outlay of capital will be influenced by the alternative cost to acquire a comparable property
• When data are available this is the most direct and systematic approach
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Sales Comparison Approach
• Units of Comparison
• Elements of Comparison • Adjustments
– Quantitative – Qualitative
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Replacement Cost Approach
• Based on substitution & contribution principles
• The buyers outlay of capital will be influenced by the alternative cost to acquire a comparable property
• Improvements add to a property’s market value
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Replacement Cost Approach
• Value the land as a vacant site
• Estimate the replacement cost of improvements
• Estimate accrued depreciation
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The Income Approach
• Based on the anticipation principle
• The buyer will outlay a capital sum now for the benefit to be derived from the future ownership of the property
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The Income Approach
• Direct (Simple) Capitalisation Value = Net income
Capitalisation Rate
• Discounted Cash Flow (DCF)
– Discounts future income streams and reversionary (or residual) value back to present value.
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What is the Valuer’s Role?
• To understand market movements
• To make comparisons between properties • To facilitate the process of value
• To make (or help make) informed decisions • To communicate information to clients
i.e. to apply the methods discussed above
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Duty of Care and Skill…
• Every professional has a duty of care and skill to their client.
• “A valuer is a person who represents him or herself as having the skill and knowledge… duty to use skill, care and diligence…”
• “It is a fundamental duty falling on a valuer to inform…of circumstances which might affect the property”
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Market Change
• & Others v Re Licensing NZ Ltd & Others [1998]
• “Loss due to economic downturn, declining markets, mortgagors’ inability to meet mortgage payments or refinance”
• Be aware of what is happening in the market
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The Role of Valuers
• Duty of care to client
• Know what you are valuing
• Know specifics of market you are valuing in • Valuation Standards
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Housing Markets
• Housing is a consumption good (for owner occupation) and an investment good (for income stream returns)
• Housing is a heterogeneous good
• House prices are known to exhibit strong cyclical patterns and volatility
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Housing Markets
• Understanding housing markets requires consideration of:
– Supply factors
– Institutional factors
– Location factors
– Financial factors
– Demographic factors
– Industrial factors
– Speculative price bubbles
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Farmland Markets
• Understandingfarmlandmarketsrequires consideration of:
– Physical and environmental factors – Location factors
– Financial factors
– Commodity markets
– Exchange rates
– Global economic conditions
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Highest and
School of Economics and Finance
The reasonable and probable use that supports the highest present value, as defined, as of the effective date of the appraisal.
The Appraisal of Real Estate (1983)
The allocation of land to that use which promises the highest return or highest comparative advantage.
Land Resource Economics
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International Valuation Standards General Standards
The highest and best use must be physically possible (where applicable), financially feasible, legally allowed and result in the highest value. If different from the current use, the costs to convert an asset to its highest and best use would impact the value. (IVS 104)
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“Most Probable Use” Graaskamp
Is it reasonably probable?
Is it legally permissible?
Is it physically possible?
Is it adequately and appropriately supported by the market?
is it financially feasible?
principle of cost vs value
principle of substitution
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• Is it legally permissible? – Planning regulations
• Is it physically possible? – Contour, size, shape
• Is it financially feasible? – Return on investment
• Is it adequately and appropriately supported by the market?
– Market demand
• Is it reasonably probable?
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Most Fitting Use • Reconciles:
– Consumer demand
– Cost of production
– Impact on third parties
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Most Probable Use
• Probably less than most fitting use
– Political constraints
– Real estate technology
– Cash flow pressures on developers
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• Highest and best use improved
– Best utilisation of existing improvements
• Highest and best use as though vacant
– Residual value of land
• Highest and best use in areas of changing use
– Demand for redevelopment sites 38
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