Real Estate Investor Magazine South Africa October 2014 | Page 25

BY PAUL STEVENS

ACQUIRING

Where Is The Value In a

Property?
Get to grips with
professional approaches

B

uying for investment is very different to buying
a family home. It is a means to increase financial
well-being and to make a profit, so determining
the value of a property and the potential profit it will
generate are vital.
The meaning of value
To establish a fair price for an investment property, we
need to go back and understand what value actually
means. The International Valuation Standards defines
market value 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 have each acted knowledgeably, prudently, and
without compulsion.”
So, value could be quite subjective depending on
your motives, but there are common approaches used
by property professionals that are helpful for investors
to get to grips with.
Comparative market analysis
The most common approach when valuing property is
the comparative market analysis: the comparison of a
property versus those recently sold or on the market.
Considering each property is different, even if they
have identical physical characteristics, value is usually
calculated by price per metre squared. This method is
only of use if it is consistently applied to a property and
directly comparable in the valuation. The key property
characteristics are location, age and specification of the
property and the permitted use or property zoning - all
key decision-making factors for investors.
Income approach
A more insightful valuation process for investors is the
income approach, where the value is based on an actual
www.reimag.co.za

or estimated income. In the case of an investment
property, that income could be in the form of rent; in
an owner-occupied building, it could be an assumed
rent (or rent saved) based on what it would cost the
owner to lease equivalent space.
Where a building is suitable for only a particular
type of trading activity, the income is often related to
the actual or potential cash flows that would accrue to
the owner of that building from the trading activity.
The use of a property’s trading potential to indicate its
value is often referred to as the profits method.
The bottom-line
Both of these valuation methods seem simple. But,
determining the value of an income-generating
property can be fairly tricky when trying to source
information and comparable sales data can be time
consuming. And, these valuation methods do not
properly factor in possible impact of changing
economic variables on the real estate market such as a
credit crisis or real estate boom.
At Just Property Group, our industry experts have
an active working knowledge of city migration and
development patterns and able to determine which
areas are most likely to experience the fastest rate of
appreciation. This is especially valuable to new investors
or those who are not from the region, but whichever
approach you use, the most important indicator of its
success is how well it is researched.

RESOURCES

Just Invest
October 2014 SA Real Estate Investor

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