DEPARTMENT OF REAL ESTATE

RE 1104 PRINCIPLES OF REAL ESTATE VALUATION

LECTURE 3
PRINCIPLES AND PRACTICES OF
VALUATION
Yu Shi Ming, PhD
Assoc Professor, Department of Real Estate, NUS
rstyusm@nus.edu.sg; 6516-3415

OUTLINE

Principles of Valuation

Valuation Process

Why the need for principles?

Key principles
Key steps
Applicability

Valuation Report

Key components
Evaluating a Valuation Report

WHAT AND WHY?

Principles are: fundamental truth as basis of

reasoning; general law as guide to action
Important for how valuation is conducted as
well as the reasons behind the valuation
Applicable in most developed markets as
they have helped to set standards; in
contrast, emerging/undeveloped markets,
practices often go against principles

VALUATION PRINCIPLES

Anticipation

strata title: mutiple-owners

Expectations of benefits to be derived in the

future For properties that are rent, anticipation is important.

Change

Dynamic nature of social, economic, legislative

and environmental forces trigger changes to the
real estate market
trend:
1.aging population
2.more and more people are unmarried or marry very late

change are sth we must always pay attention to.

VALUATION PRINCIPLES (2)

Supply and Demand

Both as factor affecting value as well as principle of

valuation implying that as a key principle, the
economic factor of demand and supply underpins
market value
Interaction between supply and demand
Shifts in supply and demand demand is more inelastic
Elasticity of demand and supply

VALUATION PRINCIPLES (3)

Competition

Prices are usually the outcome of competitive

bidding for the property, whether on a negotiation
monopoly will not occur
or tender basis.

Substitution

competition will ensure that the market forces will come

to place, so it is necessary

comparison method- substitution

Law of One Price same product should sell for

the same price in the same market does not
apply to real estate given the characteristic of
heterogeneity

VALUATION PRINCIPLES (4)

Opportunity Cost

Net cost of opportunities not chosen or options

foregone, especially for capital

Balance

sth that u need to give up

in construction cost we always take loan into
account

in order to keep livable environment, "live,work and play"

Real property value is created and sustained

when contrasting, opposing or interacting
elements are in a state of equilibrium an
optimum combination of land and capital
Underlines the importance of sound urban
do not let owner build too much
planning
height control

VALUATION PRINCIPLES (5)

a condo with a pool or without a pool has different value

Contribution

Value of a particular component is its

contribution to the value of the entire property
(value-addedness)

Surplus Productivity

Forms the principle underlying the residual

method for valuing vacant land or land with
redevelopment potential
Needs to be aligned with highest and best use
when the land is developed with best use, what
will be the land value

VALUATION PRINCIPLES (6)

Conformity

Value of a property is created or sustained when

its characteristics conform to the demands of its
markets

Externalities

Factors external to the property, such as

neighbourhood effects, can have either a
positive, neutral or negative impact on its value.

location is fixed. u cannot move but your surroundings can change, eg: neighbor,
environment
it is without your control.
when nayang kindergarten open, the parents queue overnight

HIGHEST AND BEST USE IMPLICATIONS

OF ALL
VALUATION PRINCIPLES
in singapore, it is alr given in Master plan.
but other countries do not.

The discipline imposed by market forces

will culminate in the Highest and Best
Use. in gaylang, they change the residential zone to commercial.
The reasonably probable use of vacant
land or improved property, which is

Physically possible
Appropriately supported (by market forces)
Legally allowable
Financially feasible

and that results in the highest value.

APPRAISAL PROCESS

Appraisal framework is a logical, systematic

process which provides a guide to the
appraisers.

It is also an analytic process useful for the

conduct of feasibility studies and investment
decision-making.

KEY STEPS OF THE PROCESS

the first is the most improtant step.Valuation cannot say wrong

Definition of Problem have a site visit,understand the Qn

legal description
Data Collection (Market and Property
Analysis) project: two method-->two answers-->reconsult->final
opinion
Application of the Valuation Approaches
Reconciliation of Value Indications
Final Opinion of Value
Report of Defined Value

VALUATION REPORT

A valuation report typically contains the following contents

terms of reference
intended use & purpose of the valuation
legal description
date of valuation value changes daily
must be right
delineation of the property rights/interests to be valued
data collection and property description
subject property particular property itself
the surrounding, other traction
comparable properties data, brief decription of neighbor
market analysis: micro- and macro-levels
at least two
demand and supply analysis, etc
methods
application of appropriate method(s) to value the property interest
reconciliation of value estimates via different methods (if
necessary)
report on final opinion of value
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MARKET ANALYSIS

Dynamic economic environment affecting real estate

values can be analyzed at 2 levels:

Micro-level: location-specific factors that impinge

value/use of a particular site
Macro-level: broad-based economic forces (invariant
to location) that affect values across properties
the office property in SG is competed with other countries,
but residential not currently

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MARKET ANALYSIS (2)

Defining markets by geographic areas (spatial aggregation)

Some conceptual guidelines for defining markets

parcels within delineated market are influenced by same
economic conditions
within a market definition there are distinct factors that
affect the behavior of individual properties that are
different from those factors that affect the overall market
users demand characterized by a need of specific type of
space in a rather specific location; Supply side is also
location and type specific

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MARKET ANALYSIS (3)

Market segmentation
Usage segmentation residential, commercial, hotels, etc
districts
Geographical segmentation
Characteristics of product-differentiated market
prices vary systematically due to physical and locational differences
relative prices remain stable across cyclic fluctuations or long-term
growth
household/firm mobility: competition, price elasticity and arbitrage
relative price of a parcel/property tend to change when
its characteristics (physical or locational) are altered
consumers valuations of these attributes change over time due
to changing preferences
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Space Market
Supply
Landlords

Demand
Tenants

Local, Regional,
National, and Global
Economy &Trends

Occupancy & Rents

Asset Market
Cash Flow
Pro forma

New Space

Property
Value

Market
Required
Risk-Return
Tradeoff

Owners
Sellers

Investors
Buyers

Development Industry
Yes

Profitable

Development
Cost

Source: N Miller & D Geltner Real Estate Principles for

the New Economy p28

Capital Market
Return

Risk

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EVALUATING A VALUATION
REPORT

Bottom line
A valuation report contains a thesis statement to the effect The
OMV as at (date, e.g. 19 April 2011) of the property interest at
(address, e.g. 24 Kent Ridge Boulevard) is (monetary amount,
e.g. S$200 million)

The contents of the report should be geared towards supporting

this thesis statement
quality of the report (whether you buy the thesis statement) is
a function of appropriate data analysis
watch out for opinions supported by facts vis--vis opinions
that are mere judgment calls due to paucity of data

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End of Presentation
Thank You