Role of Valuations in Major Development Projects by John Robinson (Canada)

Synopsis

In order to respond to the above statement, one might first ask three questions: "Is there, indeed, a role for valuations in major development projects?" There are many investors, developers, etc. who suffered the Toronto collapse, the Savings & Loan fiasco in the USA and Canary Wharf in the UK, who might ask why bother with appraisals? In a rapidly rising market it was hard for valuers to keep pace with the escalation in values, but when the boom is over and the bust ensues, everybody - developers, investors, lenders - starts pointing fingers at the appraisers. Therefore, at times, the role of valuation and the valuer may seem difficult to defend unless the profession makes it quite clear to its clients exactly what service it is actually providing.

Second, "What is meant by valuation?" If valuations means, "an estimate of market value", or "market price" is there indeed a role? Because in development projects there are other key factors that may be more important to the purchaser or the developer, such as profit or yield than pure value.

And finally, "What is the role of the valuer in these projects?" Is it the traditional role or is there a major opportunity for increasing the scope of the valuer's role? Indeed, "What is the future for appraisers?"

These are issues which will be discussed, however, first some background on BC Buildings Corporation's (henceforth referred to as "the Corporation") use of valuation in its development projects.

Synopsis

The retail sector in Australia, as in other countries, is an extremely important sector of the overall economy, and most Australians are affected by its efficiency or otherwise. The efficiency with which the retail sector can operate is influenced to a large extent by the availability of a suitable stock of retail property in appropriate locations, for both consumers and retailers which must be available to retailers, on suitable terms to enable them to provide a high level of service to consumers at competitive prices.

The increasing importance of personal superannuation schemes and the fact that many superannuation funds have substantial investments in retail properties, further increase the relevance of the performance of retail property investments to individual Australians. This aspect of retail property was increased in importance by the budget of May 1995, which introduced compulsory superannuation payments from both employers and employees.

Synopsis

This study empirically examines two contemporary issues regarding discounted cash flow (DCF) analysis in property investment valuations. The first issue is whether it is valid to use DCF analysis in property investment valuations. The second issue is whether it is appropriate to discount future cash flows using discount rates based on long-term bond yields.

Synopsis

Property valuers (appraisers) assess current market rental values for various contractual, statutory, and advisory purposes. This sometimes requires that rent inclusive of property running costs (a gross rent) is adjusted to its equivalent rent exclusive of some or all of the running costs (a net rent). International comparisons of the costs of occupying business premises also require adjustment of rents to take account of the differing operating liabilities that prevail in different countries.

Under the terms of a gross lease, the tenant pays one amount to occupy the premises and the landlord runs the property. Under the terms of the net lease, either the tenant runs the leased property (arranging for repairs, insuring, negotiating property tax assessments and making sure that the building functions adequately) or the tenant reimburses the landlord for the costs of running the property by way of a service charge.

Property running costs include maintenance, insurance, property taxes and for multi-tenanted properties, the provision of shared building services such as heating, air-conditioning, cleaning and management of the communal areas. The lease covenants will reveal whether these responsibilities are borne by the landlord or the tenant or are shared between them. The rent will presumably reflect the responsibilities of the parties, as well as the attributes of the property itself, and valuers must consider these responsibilities in assessing rents.

This article first illustrates some typical circumstances when gross and net rents must be directly compared. Several methods for making adjustment between gross and net rents are then suggested and the usefulness of each considered. These methods are adapted from the traditional sales comparison approach and their suitability is evaluated within the framework of the contemporary approach to appraisal espoused by Ratcliff, Graaskamp and others.