Valuation Principles and Types

Purpose of Valuation

• Determining the monetary worth of an asset, property, or investment.
• Used for financial reporting, investment decisions, legal requirements, insurance, and securing loans.

Types of Valuation

• Market Value: Estimated price a property would sell for in the current market under normal conditions.
  • Influenced by location, condition, market demand, economic conditions, and comparable sales.
• Potential Value: Estimated value based on the property's highest and best use, even if not currently realized.
  • Useful for developers and investors seeking to maximize property use.
• Sentimental Value: Emotional or personal value placed on a property, may not reflect market value.
  • Often considered for family-owned properties or historic buildings.
• Scrap Value: Estimated residual value of an asset at the end of its useful life, based on salvageable materials.
  • Important for depreciation calculations and financial forecasting.

Tenure of Land

• Freehold Property: Ownership of both the property and the land it stands on, usually without time limits.
  • Owners have the right to sell, lease, or develop the property.
• Leasehold Property: Ownership of the property for a specified period under a lease agreement, while the land is owned by another party.
  • Leaseholds may involve ground rent and value decreases as the lease term shortens.

Sinking Fund

• A fund established to accumulate money for replacement or major repairs of a property or asset.
• Ensures funds are available for large expenditures, maintaining the property's value.

Depreciation

• Reduction in value of an asset over time due to wear and tear or obsolescence.
• Methods of Calculation:
  • Straight-Line Method: Equal depreciation expense each year.
  • Declining Balance Method: Higher depreciation in early years, decreasing over time.

Capitalized Value

• Present value of future cash flows generated by a property, used to assess its worth based on income generation.
• Formula: Capitalized Value = Annual Income / Capitalization Rate

Annualized Value of Old Buildings

• Value assigned to older buildings based on potential annual income, adjusted for depreciation and other factors.
• Helps understand financial viability and return on investment for older properties.

Consideration of Building Life and Structural Stability Report

• Building Life: Expected duration a property can be used effectively.
  • Influenced by construction materials, maintenance practices, and environmental conditions.
• Structural Stability Report: Assesses the building's condition, identifying structural issues that may affect value or usability.
  • Ensures safety and determines necessary repairs or renovations.

Valuation Validity Period

• Timeframe during which a valuation is considered valid and reliable.
• Factors affecting validity:
  • Market conditions can change rapidly, affecting property values.
  • Significant changes to the property necessitate a new valuation.
• Common Validity Period: Valuations are typically valid for 6 months to 1 year, but can vary based on purpose and context.