DEVELOPMENT

VALUATION
What is Valuation?

Valuation is the
By valuation, the
technique of
Valuation is the present value of a
estimation or
analytical process of property is defined.
determining the fair
determining the The present value of
price or value of
current (or property may be
property such as
projected) worth of decided by its
building, a factory,
an asset or a selling price, or
other engineering
company. income or rent it
structures of various
may fetch.
types, land, 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,
while ensuring an appropriate site value for the landowner and a market risk adjusted return
to the developer in delivering the project”.

Development valuation merely involves the calculation of what can be achieved for a
development once completed and let, less what it costs to create. It is the most explicit and
straightforward of valuation tasks, but can be the most prone to error and most responsive to
individual supposition. It depends above all upon sound professional judgment and a
thorough investigation of all the circumstances prevailing in individual cases.
 Property valuation (or real estate appraisal) is the process of estimating the
market value of a property using generally accepted valuation standards. It is
performed by a real estate appraiser, who in the Philippines is licensed by the
Professional Regulatory Board of Real Estate Service (PRBRES) of
Professional Regulation Commission (PRC).

Estimating the value of a property is necessary for a variety of endeavors,

including sales or disposition, taxation, financing, investment analysis,
property insurance, and initial public offering (IPO).
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.
Valuation Report

Valuation Report is a document that records the instructions for the

assignment, the basis and purpose of the valuation, and the results of the
analysis that led to the opinion of the value.

A valuation report may also explain the analytical processes undertaken in

carrying out the valuation, and present meaningful information used in the
analysis.

Valuation reports can be either oral or written. The type, content and length
of a report vary according to the intended user, legal requirements, the
property type, and the nature and complexity of the assignment.
The purposes

A development valuation or viability study can be undertaken for various different purposes, which include:

• 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
Component variables
To conduct a development valuation, there are variable components about
which quantitative data is normally required. Probably the most important part of the
development valuation process is the analysis of all the determining factors that
underlie and condition the various component variables.

• Density of development
Having investigated the general climate for development and the broad planning policies in
an area, it is a necessary first step in any residual valuation to establish the optimum amount of
achievable gross floor space or units of development.
• Economic design

In the context of property development it has been written that ‘The economic design is not
necessarily the cheapest; it is the one that gives the best value for money’.

 Costs in the development equation used to be taken at too crude an average and with little
recognition of real design and construction implications.
 All parties involved in the process of property development are becoming increasingly aware of the
need to create an economic design.
• The developer is concerned with the costs that must be allowed to obtain the best return on
capital, seeking to maximize leasable floor area from a given gross area.
• The investor is more interested in the relationship between annual expenditure and the capital
tied up in the project, looking for a building that is leasable and saleable and an asset that
promises good rental growth with a sound economic and physical life.
• The occupier is concerned with the total costs of operating the building and the value it affords
in terms of comfort, convenience and appearance, and the consequent effects upon business.
Agents often speak of first impressions being very important when showing potential occupiers
around buildings and that the quality of finishes.
• Estimation of rental value
Possibly the most critical factor in the development equation is that of rental income, and yet all
too frequently the chosen figure must rest upon hunch and intuition. Estimates of rent are usually based
upon comparison with transactions conducted on similar properties in the locality, but, as already stated in
the previous chapter, true comparable are sometimes difficult to discover. Adjustments will often have to
be made to allow for differences in size, location, age, condition, occupancy and lease terms.

• Selection of capitalization rate

Most residual valuations rely upon the conventional ‘all-risks’ yield to determine the rate at
which estimated rental income should be capitalized. Also known as the initial or investment yield, it is
market-derived and, one can argue, price dominated.
• Building costs

The precision with which building costs are gauged will differ according to circumstances,
becoming more refined and exact as the valuation is worked up. At the outset it is likely that very
indicative figures will be employed, drawn from roughly similar schemes on an overall basis. If the
result is encouraging, then an outline scheme will normally be prepared by the architect, and slightly
more detailed figures, calculated against a general specification, will be used.

• Professional fees

Many developers prefer all fees to be expressed as a percentage of the total costs of
construction. It is possible to provide indicative costs for professional fees although this is not
straightforward, as the days of standard scales of fees have long since passed and everything is these
days negotiable. The traditional allowance has for some time been around 12.5–15 per cent of total
construction costs (excluding VAT and exclusive of furniture, fittings and equipment).
• Finance for development
For the purposes of conducting a basic residual valuation it is pertinent to make a few
comments regarding how the cost of finance is accounted for in an initial feasibility study. In allowing
for finance charges on construction costs in the residual valuation, adjustments are made to reflect that
funds are borrowed only as they are required.

• Promotion and marketing

The amount of the budget allowed for promotion and marketing in the development valuation
varies considerably and depends largely upon the nature and location of the project concerned.

• Contingency

It is argued that a contingency should be set aside in the calculation to allow for any
unforeseen and financially onerous occurrences that would take place during the development period
and affect viability. This might cover such circumstances as the need to provide for unforeseen service
requirements, overcome undiscovered physical problems on the land or supply special facilities for a
particularly attractive tenant.
• Land acquisition

The very purpose of many residual valuations is to identify the likely price that may be paid
or received in respect of an opportunity to develop land. Sometimes the cost of land is ignored,
sometimes it is known, and sometimes it is assumed. This is either because no change of ownership is
contemplated, or because disposition has already occurred at an agreed sum, or because the calculation
is being performed against an asking or offer price. In all circumstances, it should be remembered that
the value of land is a residual, even if it resides from another or previous computation.

• Developers’ profit
A figure to take account of the reward expected by a developer for taking the risks associated
with a scheme of development and applying his management expertise to the project is either included
within the residual valuation or is the result of it. Sometimes, indeed, it may be a combination of both,
where the calculation is being conducted to ascertain a surplus.
• The impact of time

The impact of time upon development valuation can be quite startling, particularly (but not
exclusively) in periods of high interest rates, inflation and erratic changes in both costs and rents. In
this respect, the residual method is arguably less sensitive to changes through time than the
discounted cash flow analysis approach.

• Taxation and allowances

Allowance for taxation is rarely made in residual valuations. The discounted cash flow
technique can be used to incorporate the effects of individual tax liabilities, as well as tax relief
against interest charges and tax allowances for the installation of plant and machinery and for
construction in assisted areas.
Risk and uncertainty

All the valuations of development properties are a matter of judgment and are subject to change
during the development period.
Risk is the very business of property development, and uncertainty the prevailing climate within
which development takes place. Over the two or three years gestation period that sees many a development
project progress from conception to completion, large and small changes to the variables used in an
appraisal may change. For example:

• Anticipated rental income at the outset may be adjusted several times in response to changing conditions
in the demand for and supply of the kind of premises in question.
• Initial yields in the property investment market may fluctuate according to the general state of the
economy or the special circumstances of that particular sector.
• Building costs could increase, either as the result of an overall rise of prices across the construction
industry, or because of localized difficulties in the provision of labor or materials.
• The time taken to execute the building works and let or sell the finished development may be longer than
originally expected, because of any one of several reasons relating to planning, design, construction or
marketing programs.
• Finance charges on borrowed money will be affected by any changes in costs or time, and any agreed
alterations to the rate of interest that occur during the development period as a result of external forces.
7 Factors That Determine a
Property’s Value

Location Development Accessibility Renovation

Size and Building

Property Age
Space regulations
1. Location
Location is one of the most important factors that impact a property’s value. Properties close to area
with high foot traffic usually have greater chances of appreciation. The more accessible a property’s location is,
the more valuable the property is.

2. Development
A property situated within the vicinity of areas being improved and developed is more likely to have a
higher value compared to one located in a remote neighborhood. This is because developments tend to attract
more population, which means higher demand for residential and commercial real estate.

3. Accessibility
Accessibility likewise plays a key role in determining real estate valuation. Properties that can be easily
reached using various modes of transportation are likely to increase in value over time. The concept is that the
lower the cost (in terms of time, comfort, and money) it takes to reach the property, the higher the property’s
value is.

4. Renovation
Most real estate investors and homebuyers consider the property’s renovation potential when deciding
to purchase or invest in one. This includes the likelihood of increasing the floor space, laying a patio, installing a
pool, or adding an extra story. If the property provides an allowance for the buyer to personalize or improve the
structure, then its value will likely increase.
5. Property age
Age is another factor used to determine a property’s value. Typically, newly constructed properties
appraise at a higher value because the critical parts like plumbing, electrical elements, and roof are newer and
less likely to break down.

6. Size and space

The value of a property in the Philippines is estimated per square meter. The closer the property to an
urban area is, the higher its value.
Apart from size, the usable space in the property is also factored in when determining real estate
values. Bedrooms, bathrooms, and kitchens that can be extended are highly valued.

7. Building regulations
Building regulations often determine how the property may be used for residential or commercial
purposes. For instance, if the policies allow restaurants, convenient stores, or boutiques to operate within the
area, then the property’s value would increase due to its improved desirability and increased accessibility to
shops.
If a city rezones a residential area into a commercial zone, trendy businesses will move in, increasing
the values of the residential properties due to the vicinity’s enhanced appeal.