Hello there, and Welcome to Introduction
Real estate has always been an alternative investment for investors, developers, funds, banks, and individuals. Real estate valuation is a fundamental aspect of the property market and is crucial for buyers, sellers, investors, developers, and lenders. Whether you are entering the real estate market or seeking to refine your investment strategy, understanding the basics of real estate valuation is essential.
Understanding real estate valuation helps you negotiate better deals, secure appropriate financing, and make investment decisions. For sellers, it ensures that properties are priced competitively; similarly, for buyers, assessment helps if a property is priced fairly. Investors use valuation to evaluate the potential return on investment and the risks involved.
Table of Contents
What is real estate valuation
Let’s start with the basic question, what is Real estate valuation? It is nothing but assessing the property value as of a date (also known as a valuation date), and it defines the current worth of the property in the market.
Importance and the purpose of the valuation
The valuation of real estate assets is essential to making decisions regarding real estate transactions. Assessment reports or appraisal reports are used by government agencies, insurance companies, institutional investors, individuals or property owners, lenders, or financial institutions for various decision-making purposes.
The reports are most widely used for secure lending, financial reporting, investment decisions, insurance, tax, capital gain tax, etc.
List of asset classes
The real estate industry has a mix of various asset classes, including residential, commercial, retail, industrial or warehouse, and hospitality.
Let’s understand each asset class with a few examples.
Residential
Residential developments are primarily apartments, villas, and row houses, and these developments are in the form of gated communities, townships, and standalone developments (self or individual).
Commercial
Commercial developments are primarily IT/ITeS parks, integrated commercial development (along with office space, it will have other amenities like support retail, food courts, entertainment, etc.), and any standalone development that is used for office space.
Retail
Retail developments are malls and shopping complexes.
Industrial or Warehouse
Industrial or warehouse facilities are organized storage facilities, assembly points, etc. Warehouse developments are primarily used by e-commerce players, 3PLs (third-party logistics), FMCG, engineering, etc.
Hospitality
Hospitality developments are hotels and service apartments.
Valuation Techniques
Till now, we understood the purpose of valuation and the list of asset classes. Now let’s learn about a list of valuation approaches or techniques used in real estate valuation. Further, each approach has various methodologies to assess the value of the property.
Income Approach
The Income Approach is suitable for income-generated property. It allows investors to estimate the market value of the property based on property income.
The Following are the two commonly used methodologies to assess the value of income-generated property.
- The Discounted Cash Flow Method is also known as the DCF Method.
- The Income Capitalization Method is also known as the IC Method.
Direct Comparison Approach
The Direct Comparison Approach also known as the Market Approach, provides an indicative value of a property or asset by comparing it with similar comparable assets.
The following are two major circumstances where the market approach should apply.
- A similar asset has been sold or transacted in the same market.
- A similar asset is actively available in the same market for trade
Cost Approach
The Cost Approach estimates the value of the property based on the cost expected to be incurred to rebuild similar development on the underlying land after adjusting the specific parameters, including depreciation, age, nature of the building, etc.
The below diagram shows the summary of valuation methodologies
Major Players
Let’s understand who the major players are. In India, we have Registered Valuers and International Property Consultants (IPCs).
Registered Valuers
A person or entity registered with the authority as a valuer in accordance with the provisions of the Rules. As per the Central Government under Section 458 of the Companies Act, 2013, the governing authority of Registered Valuers is the Insolvency and Bankruptcy Board of India (IBBI).
International Property Consultants (IPCs)
IPCs are independent consultants. The valuation is carried out in accordance with Royal Institution of Chartered Surveyors (RICS) valuation standards, and it will also comply with the International Valuation Standards (IVS).
A few notable IPCs are CBRE, JLL, Cushman and Wakefield, Savills, Colliers, Knight Frank, etc.
Conclusion
With a clear understanding of a property value, investors can better evaluate potential returns and mitigate risks. The value of the property can be determined by employing various valuation methodologies such as the Income Approach, Cost Approach, and Direct Comparison Approach depending on the status of the project, type of asset class, market conditions, etc.
1 Comment
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