Valuation of Real Property: Methods, Bases and Computation
This domain tests your command of the five methods, the correct basis of value, and clean arithmetic supported by adjusted comparables.
Methods and when to use them
- Comparison: the default for residential and simple commercial property with good evidence.
- Investment (income capitalisation or DCF): for let property; capitalise net income, not gross rent.
- Profits: hotels, filling stations, cinemas, where trade accounts are the evidence.
- Cost or depreciated replacement cost: specialised property with no market (schools, hospitals, plants).
- Residual: development land, deducting costs and profit from gross development value.
Bases and factors
Market value under the Green Book and IVS is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller, after proper marketing, each acting knowledgeably, prudently and without compulsion. Years' purchase in perpetuity equals 1/i; for a term, YP = (1 - 1/(1+i)^n)/i. Tenure matters: Land Use Act rights of occupancy, unexpired terms, Governor's consent, encumbrances and easements all move the figure.
Worked example
A shop produces net income of N2.4m after outgoings. At 8% the YP in perpetuity is 12.5, giving N30m. If instead only a 12-year unexpired leasehold interest is valued, YP for 12 years at 8% is 7.536, giving N18.1m, plus a deferred reversion if appropriate. Same income, very different answer because tenure is reflected. State the assumption about renewability and consent.
Traps
Capitalising gross rent; applying a freehold yield to a short leasehold; using comparables without adjusting for date, size, location and condition; ignoring voids, service charge and rent review provisions; mixing bases of value in one report.