When it comes to property, whether it’s residential or commercial, there are many factors to consider if you are willing to purchase, rent, or sell the property. Therefore, you need a property valuation.
There are five main methods that can be used in a property valuation. An experienced property valuer such as Windmills Group can use one or more of these methods when calculating the true value, depending on the type of property.
This method is applied to the most common property types, like residential property, commercial property, offices, and warehouses. This approach looks at AED rates per sq.ft of the surrounding lettable and built-up areas. This would be a preferred method, as each of the following methods requires some form of comparative analysis to function. After that, an estimate of the market value is established.
This method is used when no comparable transactions are available, commonly used in restaurants, hotels, and businesses that don’t allow the Comparison method to be made as it holds a unique business status. An estimate of the gross profit of the business is made then deducting any liabilities and expenses made, excluding any rental payments. With this calculation, we have an amount of capital to be shared between the tenant (Running the business) and landlord (the renter ), known as the divisible balance.
This method is used for properties that could be developed or are vacant land whose use is being changed to something possibly more profitable. This method might prove inaccurate because several inputs and costs are challenging to determine as they have a tendency to change over time. The total gross development costs minus the below are considered to be the net residual value.
- Construction, Infrastructure & Landscaping Costs
- Professional Fees
- Cost of Finance
- Contingency Costs
- Marketing and Legal (Sale/Letting)
- Developer’s Profit
- Other Costs (Planning/Purchasers costs)
The Contractor’s Method:
If a property has a specialist nature, meaning there are no market transactions occurring, this method assesses all the costs of providing a modern equivalent property. These will then be adjusted to reflect the age of the subject property.
The formula for the contractors’ valuation method is: the cost of the building, plus the cost of the site, equals the entire cost of a similar building (minus the figure for depreciation and obsolescence or any other factor affecting profitability), which then finally results in the value for the existing property.
Property Value = Cost of Site + Construction Cost of Buildings
Used to determine the market value of a freehold or leasehold property based on its projected future income generation. This method is used for the property’s main function, where the tenant is providing the landlord with a return on their investment on the building purchase capital lost.
The revenue profit is analyzed and applied to future rental income. The net present value (NPV) is calculated by the profit which is then applied to the future rental income and discounted back to the present day. This would be an indicator of the building’s worth as it is currently.
Understanding that various methods of valuations are essential. For buyers, A valuation can reduce the risk of purchasing an asset for more than its true market value, especially if you are buying privately. For sellers, there are multiple reasons why you would require a valuation. Most commonly would be to get an idea of the potential selling price, and secondly, would be to gain an understanding if there would be an opportunity to make any improvements to add further value. Knowing whether it would be the best time to sell now or at a later date due to the fluctuating market is also useful to businesses.
A valuation service is required in many different situations whether you are thinking about, selling, renting, or buying. Be sure to seek out a valuer who is a registered member of a valuation-based institute to ensure that they will meet all requirements, and ethical standards and procedures. This will mean you are getting the right advice from a property expert who is bound by his/her professional duty. The team at Windmills Group can help you in all aspects of the above letting you benefit from their vast wealth of knowledge and industry experience.
Windmills Group provides asset valuation services and real estate valuation services in Dubai as per International Valuation Standards governed by RICS and RERA. We value all types of real estate properties including residential, commercial, industrial, and trading properties like hotels, malls, schools, hospitals, etc.