Department of Estate Management and Valuation

Faculty of Management Studies and Commerce

University of Sri Jayewardenepura

Subject : Principles of Valuation

Subject Code : EMV 2377
Subject Coordinator : Dr. (Mrs) T G U Perera
Lecturers : Dr. (Mrs) T G U Perera
Tutor : Mr Nimasha Sugathadasa
Year/Semester : Year II Semester II
Number of Credits : 03
Number of Lectures : 30
Total Lecture Hours : 45
 Learning Outcomes

UNDERSTAND THE KEY TERMS RELATED TO UNDERSTAND THE FUNDAMENTALS OF THE

THE COMPARATIVE METHOD OF VALUATION MARKET APPROACH AND COMPARATIVE
METHOD OF VALUATION
 Market Value is Intended by

“The estimated amount for which the property

should exchange on the date of valuation
between a willing buyer and a willing seller in an
arm’s length transaction after proper marketing
wherein the parties had each acted
knowledgeably, prudently and without
compulsion.“
 The Three approaches and Five Methods
of Valuation
◦The Sales Comparison Approach ◦ Comparable method
(value bases its opinion of value on what similar properties otherwise known ◦ Investment method
as “comparable”, or “comps”) in the vicinity have sold for recently.) ◦ Traditional Investment
method
◦The Cost Approach ◦ Discounted Cash flow
Method
(how much a property would cost to replace (meaning, rebuild) after ◦ Profits method
subtracting accrued depreciation)
◦ contractor’s method
◦The Income Approach ◦ Residual method
(property generates income for it’s owner, that income, or potential for
income, helps to substantiate, calculate or identify the market value of the
property)
 BASES OF VALUE (IVS, 104)
◦ IVS-defined bases of value:
◦ Other bases of value (non-exhaustive
(i) Market Value We deal list):
(ii) Market Rent with this
(i) Fair Value (International /Local
(iii) Investment Value/Worth Financial Reporting Standards)
(iv) Equitable Value (ii) Fair Market Value (Organization for
(v) Synergistic Value Economic Co-Operation and
Development)
(vi) Liquidation Value
(iii) Fair Value (Legal/Statutory).
(vii) Replacement Value.
INTRODUCTION: MARKET APPROACH -
COMPARATIVE METHOD
◦ Principle:
◦ Comparing the property to be valued with similar properties, and the prices
achieved for them and allowing for differences between them to determine
the market value.

Compare Like with Like Adjustment for Dissimilarities

HETEROGENEITY IS INHERITANCE TO
PROPERTY
 A Comparable

A comparable is an item of information

used during the valuation process as
evidence to support the valuation of
another.
 Can apply to find
◦Market Rent
◦Market Value
Possible Dissimilarities (Heterogeneity)
of Similar Property
◦Location – link to immobility
◦Physical State – novelty, maintenance etc.
◦Tenure – Freehold, leasehold, common etc.
◦Purpose – for what purpose valuation is
done
◦Time – a transaction time
 Criteria
◦ Transactions must be recent – the period of time applicable
will be dependent on market conditions at the time of the
transaction and current market conditions. This can
dramatically change in a short period of time.
◦ Macro –economic conditions at the time of each
◦ comparable transaction. Any special considerations of the
transaction should be taken into account. It should be
ascertained if there was a special purchaser involved
◦ The property must be a similar property with similar qualities.
Cont./
◦ The comparable must be in close proximity
◦ The more evidence available the better the valuation.
◦ A thorough inspection of all underlying factors in the market must
be made
◦ Trends in market values should be observed.
◦ Determine likely purchasers in the market place, their
requirements and purchasing power.
◦ Valuer must be extremely familiar with the market within which
the valuation is being carried out and also with the area within
which the property is located.
 Ideally, comparable evidence should be:
(RICS, 2019)
◦ comprehensive – there should be several comparable rather than a single transaction
or event
◦ Vicinity / Location
◦ very similar or, if possible, identical to the item being valued
◦ recent, i.e. representative of the market on the date of valuation
◦ the result of an arm’s-length transaction in the market - buyers and sellers act
independently without one party influencing the other
◦ verifiable
◦ consistent with local market practice
◦ the result of underlying demand, i.e. comparable transactions have taken place with
enough potential bidders to create an active market.
Sources of comparable evidence
◦ Market Evidences
◦ Direct transactional evidence
◦ Publicly available information
◦ Published databases
◦ Asking prices
◦ Historic evidence
◦ Indices
◦ Automated Valuation Models
(RICS, 2019)
Land Registry
Entries
Please watch: https://www.youtube.com/watch?v=eOFXJqbnu7k
 Recording comparable evidence

◦CMA (Comparative Subject property

market Analysis)
comparison
table.xlsx
Steps to comparative method
◦ Select suitable comparable (comparable set)
◦ Extract relevant information
◦ Analyze information including comparable sale
◦ prices, rental values, yields etc.
◦ Adjust sale prices for noted differences. [adjustment
reflects the contribution to the market value]
As a rule, the fewer the total number of adjustments, the smaller the adjustment amounts, and the less the total
adjustment amount, the more reliable the comparable.

◦ Formulate an opinion of market value for subject property.

 Advantages
◦ Can use for both rental/capital valuations and obtain yield
◦ It is an excellent reliable method when the market is stable and
active.
◦ Can be used as a basis for all other methods of valuation.
◦ Can you used as a cross check when other valuation methods
are employed
 Disadvantages
◦ Not always possible to find good comparables or enough comparables
◦ Property is a heterogeneous product and each piece of land is unique and therefore there will
always be differences even between what appear to be identical properties.
◦ It is of little use in a poor market with few transactions and relatively little activity.
◦ Too much emphasis can be placed on past evidence and may not reflect what current market
values are.
◦ A comparable used may have had a special purchaser who was willing to pay over the market
value for the property in order to acquire the property.
◦ The elements for comparison can be many and different valuers may place different weightings
against these elements.
◦ The method does not take factors into account that are beyond the property attributes such as
the economic, socio or political environment and does not deal with supply and demand factors.
 Disadvantages
◦ The time factor in comparative analysis is critical as the more time that has
elapsed between the transactions and the valuation date, the less reliable the
evidence will be. While there is no ideal length of time or maximum amount of
time recommended, the skilled valuer will be able to know what time intervals are
appropriate by the level of activity in the market and the market conditions and
market cycles.
◦ The quantum of adjustment to be made for the attributes can be difficult. It is
difficult process for a valuer to be objective when quantifying adjustments that he
is not placing his or her own opinion of importance on an attribute.
 Analysis of comparable evidence

◦Establishing a common measurement

or other comparison standard
◦Making adjustments
◦Quantitative
◦Qualitative
Unit of Measurement

◦Urban land – perch/lacham

◦Rural land –acre
◦Plantations - hectare
◦Condominium - sq. metre/bedroom
 Dealing with a shortage of evidence
◦ The market may be inactive, with few
transactions occurring to provide evidence. indeed, Red Book Global Standards states that
◦ By contrast, the market may be changing ‘valuers should not treat … a statement expressing
less confidence in a valuation than usual as an
rapidly, leading to a situation where admission of weakness … it is …a matter entirely
comparable evidence quickly becomes out of proper for disclosure’. If a client understands that
date. unusual market conditions result in an uncertain
valuation it may enable them to make a better-
◦ The property may be unusual in terms of its use, informed business decision. It is for this reason that
construction, location or other factors. Red Book Global Standards requires the valuer to
‘comment on any material uncertainty in relation to
◦ The local market may lack transparency, with the valuation where it is essential to ensure clarity
little available information on prices or on the part of the valuation user’
transactions. This is more common in markets in (VPS 3, Valuation reports, section 2.2(o))
the early stages of development.
 References
◦ Shapiro, E., Mackmin, D. and Sams, G., 2019. Modern methods of valuation.
Taylor & Francis.
◦ Wickramaarachchi N C and Kaluthanthri P (2016) “Real Estate Valuation”
◦ RICS professional standards and guidance, global Comparable evidence in
real estate valuation 1st edition, October 2019
ILLUSTRATIONS