DEVELOPMENT

VALUATION
Presented by: RHEA C. REPAJA &
EMERSON S. DANDUAN
What is valuation?

Valuation is the technique of estimation or determining the fair price or value of property
such as building, a factory, other engineering structures of various types, land, etc.

By valuation, the present value of a property is defined. The present value of property
may be decided by its selling price, or income or rent it may fetch.

The value of property depends on its structure, life, maintenance, location, bank interest,
etc.
Development Valuation/Appraisal

The RICS define a development appraisal as “an objective financial viability

test of the ability of a development project to meet its costs including the cost of
planning obligations, whilst ensuring an appropriate site value for the landowner and
a market risk adjusted return to the developer in delivering the project”.
From a valuation point of view, it is an objective test of financial liability. Valuers/Appraisers
use a residual method of valuing which recognizes that the value of the scheme is a function of
many different elements. A well informed valuer will seek to check the valuation against any
market evidence where available. A valuer can assess the level of return generated from the
proposed project and also establish the residual site value by inputting pre-determined levels of
returns.

From a planning point of view, it involves research into the constraints and opportunities
evolving from the location, legal and planning aspects of potential sites as well as their
physical characteristics. This can be a complex process but in terms of planning, the document
provides a basic guide to the types of information the council needs in order to evaluate the
economic viability of a development.
For developers, the document may set out whether the proposed development will
impact on, or be impacted by the Local Plan, planning history, environmental
constraints and effects on the local community and local businesses.
Where a planning obligation reduces the site value to the landowner and return to
the developer below an appropriate level, land will not be released and or
development will not take place so a development appraisal is of pivotal
importance.
Development properties are defined as interests where redevelopment is required to
achieve the highest and best use, or where improvements are either being
contemplated or are in progress at the valuation date and include:

(a)the construction of buildings,

(b) previously undeveloped land which is being provided with infrastructure,
(c) the redevelopment of previously developed land,
(d) the improvement or alteration of existing buildings or structures,
(e) land allocated for development in a statutory plan, and
(f) land allocated for a higher value uses or higher density in a statutory plan
Valuations of development property may be required for different purposes. It is the
valuer’s responsibility to understand the purpose of a valuation. A non-exhaustive
list of examples of circumstances that may require a development valuation is
provided below:

(a) when establishing whether proposed projects are financially feasible,

(b) as part of general consulting and transactional support engagements for acquisition and loan
security,
(c) for tax reporting purposes, development valuations are frequently needed for ad valorem
taxation analyses,
(d) for litigation requiring valuation analysis in circumstances such as shareholder disputes and
damage calculations,
(e) for financial reporting purposes, valuation of a development property is often required in
connection with accounting for business combinations, asset acquisitions and sales, and
impairment analysis, and
(f) for other statutory or legal events that may require the valuation of development property such
as compulsory purchases.
 Land is one of the major factors of production and is supplied by
nature without the aid of humans. Land may include not only the earth’s
surface, both land and water, but also anything that is attached to the earth’s
surface, including all natural resources in their original state, such as mineral
deposits and timber.

Property refers to the inherent rights of ownership and future benefits

of tangible and intangible assets and is taken to mean any right or interest
reflecting a source or attribute of wealth. The word “property” when used
without further qualifications, may refer to real property or personal property,
or other types of property, such as businesses and financial interests, or a
combination thereof.
Market value is defined under the Philippine Valuation Standards as the estimated
amount for which a 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.

Appraiser or Valuer refers to a person who conducts valuation/appraisal;

specifically, one who possesses the necessary qualifications, license, ability and
experience to execute or direct the valuation/appraisal of real property

Residual Value – is the estimated value of a fixed asset at the end of its lease term
or useful life.

Land Value – is the value of a piece of property including both the value of the
land itself as well as any improvements that have been made to it.
Development Valuation: Purposes

• Calculating the likely value of land for development or redevelopment where

acceptable profit margins and development costs can be estimated

• Assessing the probable level of profit that may result from development where
the costs of land and construction are known

• Estimating the required level of rental income needed to justify the development
decision

• Establishing a cost ceiling for construction where minimum acceptable

profit and land value are known
3 Factors that Affect Real Estate Value

A property’s value can appreciate or depreciate. There are a number of factors

that lead to these changes and among these are as follows:

Location – In real estate, location matters. Properties in a good neighborhood

and near areas with high foot traffic usually have greater chances to appreciate
in value.

Accessibility – Properties that are more accessible or those that can be reached
using various modes of transportation may be given a higher value.

Development – A property that is within the vicinity of areas being developed

is more likely to increase in value. This is due to the fact that developments can
attract more demand for properties within a specific location.
VALUATION APPROACHES AND
METHODS
• Market
Approach
The market approach provides an indication of value by comparing the asset with
identical or comparable (that is similar) assets for which price information is
available.

“The sales comparison approach recognizes that property prices are determined by
the market. Market value can, therefore, be calculated from a study of market
prices for properties that compete with one another for market share. The
comparative processes applied are fundamental to the valuation process.” –
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation
Standards under Philippine Setting (2009)
The market approach should be applied and afforded significant weight under the
following circumstances:

(a) the subject asset has recently been sold in a transaction appropriate for
consideration under the basis of value,
(b) the subject asset or substantially similar assets are actively publicly traded, and/or
(c) there are frequent and/or recent observable transactions in substantially similar
assets.

The market approach may also be appropriate for establishing the value of a
completed property as one of the inputs required under the residual method, which is
explained more fully in the section on the residual method.
• Income
Approach
The income approach provides an indication of value by converting future cash
flow to a single current value. Under the income approach, the value of an asset is
determined by reference to the value of income, cash flow or cost savings
generated by the asset.

The income approach may also be appropriate for establishing the value of a
completed property as one of the inputs required under the residual method
• Cost Approach
The cost approach, also known as contractor’s method, is based on the
proposition that an informed buyer would pay no more for a property than the
cost of land and improvements required in reproducing a substitute property with
the same utility as the subject property.

The income approach may also be appropriate for establishing the value of a
completed property as one of the inputs required under the residual method.
• Residual Method
The technique most frequently employed in the financial analysis of development
projects is generally known as the residual valuation method.

Gross Development Value − (costs + profit) = residual value

The residual method is so called because it indicates the residual amount after
deducting all known or anticipated costs required to complete the development from
the anticipated value of the project when completed after consideration of the risks
associated with completion of the project. This is known as the residual value.

In applying the residual method, a valuer should consider and evaluate the
reasonableness and reliability of the following:
(a) the source of information on any proposed building or structure, e.g., any plans
and specification that are to be relied on in the valuation, and
(b) any source of information on the construction and other costs that will be
incurred in completing the project and which will be used in the valuation.
The following basic elements require consideration in any application of the method to
estimate the market value of development property and if another basis is required,
alternative inputs may be required.

(a) Completed property value

(b) Construction costs
(c) Consultants fees
(d) Marketing costs
(e) Timetable
(f) Finance costs
(g) Development profit
(h) Discount rate