Property Valuation Presentation for EEPFP

05th February 2013

AGENDA

1. Property Valuation2. Function of a Valuer3. Reasons for undertaking valuations4. Constitutional rights5. Factors to be considered in valuation of property6. Municipal property rates Act 6 of 20047. Valuation approaches8. Market Approach9. Income Capitalisation approaches10. The discounted cash flow method or DCF-

AGENDA

11. The discounted cash flow method or DCF 12. Residual land value : Development 13. Property and Rist

1. What is property valuation?“ Property valuation may be described

as the process which a professional individual qualified to quantify and analyse fixed assets undertakes to establish a range of value or values for a specific property, real estate or

property portfolio, taking into account the internal as well as the external environment and all elements that

may have an impact on these”

Let’s look at some of these words and their impact on the statement:1.Professional individual- This means an individual as described in the Property Valuers Profession act 47 of 2000. This legislation was passed to govern and gauge the Property Valuation Industry. The legislation provides for 3 main distinctions;A) Candidate valuerB) Professional Associated ValuerC) Professional Valuer

2.Functions of a ValuerThe valuer should have a broad based knowledge of the following aspects*The locality and local environs of the subject property, its relation to the macro and micro economic factors and its proximity to amenities and major services.

*The financial aspects of the property with specific reference to the income that the property may obtain if fully let at market related rentals, the expenses on the property as well as the capitalisation rate that is applicable on the property. The valuer must be able to analyse and express an informed opinion on these aspects.

*The internal and external environmental analysis of the property and the impact that these factors may have on the functional, physical and financial obsolescence of the subject property. *The correct identification of the property utilising the exact and precise legal description, the scrutinization of the title deed and lease agreements on the property.

* The local, national as well as international real estate market analysis and indications on these markets with specific reference to the impact on the subject property.* The investment potential and institutional investment portfolio aspects and the positive and negative factors that may have an impact on the portfolio or the institutional property investor.

3. Reasons for undertaking valuations

Purchase and Sale Rental DeterminationCorporate Reporting /Asset IdentificationPublic flotation/Listed FundsFinancing/Mortgage Replacement costForeclosure/Litigation

ExpropriationLand RestitutionRatingTaxation –Estate DutyTransfer DutyCapital GainsServitudes

4. Constitutional Rights

“No person shall be deprived of life, liberty, or property, without due process of law,

nor shall private property be taken for public use with out

just compensation”

5. Factors to be Considered in valuations of Property UniqueLocationSizeTown Planning Information e.g Spatial Development FrameworkSite SpecificConcept of Highest and Best useZoning/Use e.g Bulk (FAR)

Title Restrictions e.g Leasehols

Geological ConditionsAvailability of ServicesLand Claims

6. Municipal Property rates ACT 6 of 2004.

All properties valued at market value on improved value onlySectional Title Units separately valued

7. Valuation Approaches

The valuation or the establishment of value is different for each category and type of property. For the purposes of this presentation we would briefly like to focus on the following methods of establishing value.

8.Market Approach- The Market approach is a method of direct comparison. This means that the property is compared directly to properties of a similar nature. The similarity of the property in the case of a residential property would then be the location, the extent of the subject property, the finishes, the accommodation, the overall appeal, the proximity to amenities etc. These aspects are then used to scrutinize the subject property and create a range of value based on analysing comparable sales that have the same comparable aspects as that of the subject property. The simplified explanation is comparing an apple with an apple. (This particular approach is most often used for residential type properties)

9. The income capitalisation approach- The income capitalisation approach is a financial and economic

approach to Real Estate valuation. This approach assumes that the property will be fully let at market related rental rates

affording the property to generate a gross income stream over one year. This gross

income stream will then be simplified into a net income stream taking into

consideration all the expense aspects required in order for the property to

function correctly. These expenses include but are not limited to Rates and taxes, Management Fees, Maintenance, Audit Fees, Security, water and lights etc.

Once a net income stream is established the property is than capitalised by an appropriate capitalisation rate. These rates are deduced by the valuer in terms of analysing similar sale in the direct local environment. If the value of sales has been analysed and appropriate market related rentals are applied to the property with a similar on anticipated expense ratio than the specific capitalisation rate may be obtained for the subject node and then applied to the subject property. This method is primarily used for commercial type properties.

Income Cap MethodOn completion of the renovations as proposed

Tenants Estimated Lettable unit type / m² Rental Monthly total

Various 106 R 2 000.00 R 212 000Various 106 R 2 500.00 R 265 000Various 12 R 3 250.00 R 39 000Various 465 R 40.00 R 18 600

58 Bays 0 R 120.00 R 6 960224 R 2 583.33

Number of flats vacant per month 3 R 8 123

Recoveries R 138 320Per unit R 617.50

Less: Expenditure R 364 760Per unit R 1 628.39

x 12 monthsx 12 monthsx 12 monthsx 12 monthsx 12 monthsx 12 monthsx 12 monthsx 12 monthsx 12 months

5%1.00%

x 12 months

Value per unit R 150 000 per unit

R 184 800

R 11 200R 5 600

Security (2 x Guards 24Hr) R 15 400 R 15 400

R 2 544 000

Gross income

R 83 520

2 Bedroom R 468 000

R 6 401 239

R 6 498 720

Retail (GLA un determined)

R 97 481

Valuation amountRounded valuation amount, on completion of the renovation costs

R 33 490 582R 33 500 000

R 27 078Audit feeRepairs & maintenance

Management fee

R 50 176

Capitalisation rate utilisedNett annual income

11.0%

R 50 176R 5 416

R 3 683 964

R 324 936of gross rental incomeof gross rental income

Ancillaries

R 11 200Refuse estimate R 5 600

R 56 000R 2 550

R 83 300Lift maintenance

Water estimate R 78 400

R 5 000

Sub Total

R 295 680

InsuranceR 672 000

R 5 000

R 24 640

R 56 000

Sanitary fees estimate

R 60 000

Expenditure / income ratio 68.38%

R 64 987R 602 112

Vacancy factor 1.50%

Annual rental (including esc)

Sub Total

1 Bedroom R 3 180 000Bachelor

Basement parking

Accommodation

R 223 200

R 999 600R 30 600

R 24 640

R 940 800

Assessment rates estimate

Electricity estimateR 78 400R 83 300

R 1 659 840

R 4 377 115R 8 061 079

R 2 550

R 134 400R 67 200

10. The discounted cash flow method or DCF- This is the best method to utilize when a property with a particular investment angle is analysed. This methods takes into consideration the Net Present Value of the asset as viewed from the financial perspective of “ The anticipated expectations a property would have based on an income stream into perpetuity and then discounted back as of today to reflect that future anticipated returns as a realistic value today”

11. The depreciated replacement cost method- This method is most often used when the property or the environ lacks the required information to formulate a range of value as afforded by the first two methods. This method anticipates the current replacement value of the improvements in question and then depreciated these improvements utilising a factor of depreciation as deduced from the economic, functional, financial and physical obsolescence that may have an impact on the value. This is not the best valuation approach and is often used in conjunction with one or more of the other major methods.

Depreciated Replacement MethodDescription Area in m²  

Replacement cost in m²  

Total Replacement

cost           

Shell (Main building) 5697   R 10 000   R 56 970 000

Basement 1972   R 3 500   R 6 902 000

None 0   R -   R -

None 0   R -   R -

Site Improvements         R - ##########

        Rounded R 63 872 000

Plus          

Professional Fees @ 16%       R 10 219 520

Demolition Cost 3%       R 1 916 160

Local authority & statutory fees 2%       R 1 277 440

Developers profit 5%         R 3 193 600

           

Total Replacement Cost (Exc VAT)         R 80 478 720 Plus VAT @ 14%       R 11 267 021 ##########

           

Total Replacement Cost (Inc VAT)         R 91 745 741 Less Total Depreciation         73 396 593

Depreciation rate         0.80

Depreciated Replacement Cost         18 349 148Plus Land Value 2235   R 600   1 341 000

           

Market Value         19 690 148Say         20 000 000.00

12. Residual Land value: Development

The site measurements are approximately 30m x 29m

Building 1 and 2 provide 36

The total building extent of 1 204 m²

Construction costs are ± R 7 250 /m²

R 8 729 000 R 8 729 000

R 242 472 Per unit

An opportunity rate of R50, 000 per opportunity (calculated over the full extent of the property)Add land cost @ R 50 000

R 1 800 000 R 1 800 000

Gross cost of development R 10 529 000

R 290 000

Developers profits @ 25.00% R 450 000 R 1 350 000

R 37 500

Estimate residual value, including developers profits

We have assumed a similar use to that of the "Brickfields" development and we have taken measurements to assimilate buildings fromthis development that would fit on the site. We have determined that building 1 and two would just fit on the site.

units, of various sizes, from 2 bedrooms to a bachelor

Per opportunity

Estimate residual value, excluding developers profits

Per unit, deemed market related for the area.

Per opportunity

13. Property and riskMarkowitz wrote “Although some risk can be diversified away a certain amount of risk will always remain”It is important to take into consideration risk. Risk and its effect on property must always be analysed and scrutinized at the highest possible level. For the purposes of valuation the Professional must analyse such aspects as vacancy factors, inflation, confidence in the market with reference to credit and credit lending policies, international trade and trade deficits, exchange rates and policies, political aspects socio aspects, and a broad spectrum of local and international financial indicators.

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