ESTATE MANAGEMENT PROJECT TOPICS AND MATERIALS ON APPLICATION OF THE INVESTMENT METHOD OF VALUATION IN VALUING RESIDENTIAL PROPERTIES IN CALABAR METROPOLIS
Background of the study
Assessment plays an important role in determining the value of property for mortgage, selling, lease, rent, reimbursement, insurance, rating etc. In carrying out any assignment of valuation for mortgage purposes, the valuer has the task of selecting the appropriate method to be adopted in such assignment. The cost method is mostly adopted by most Nigerian valuers; some follow the price analysis approach, while only a few embrace the valuation method of investment. The investment approach was technically considered acceptable in the assessment of the income generating assets for mortgage purposes. On the contrary, in practice, a majority of the valuers often adopt the cost valuation method. The problem remains: which approach is the most effective when valuing mortgage income properties? This and other issues that worry about the reliability of the investment method are examined in this research. The principle of the valuation method of investment is that property is viewed as an investment that generates income in the form of rent or benefit accruing from it. This is the most commonly used approach not only for freehold interests but also for leasehold interests, life interests, and reversals. The application of this approach involves assessing the annual value at which the property will yield an annual return on the money spent on the investment purchase. This must be capitalized using appropriate interest rates to arrive at the property’s capital value (James, 2015).
As noted earlier, the valuation for mortgage purposes is prefixed on the assumption of a need to recover funds by the sale of the property if the borrower defaults in repayment of the loan plus accrued interest when legally demanded. In order to recover funds, the property will have to be sold in the market which the property is a component part. It is logical therefore, that the method adopted should be one that is based on market behaviour and consequently reflects what the market will pay. Studies have pointed out that by valuation principles; investment method is the most appropriate and reliable for valuing income producing properties especially for mortgage purpose (Ajayi, 1998: Effiong, 2007; and Ayedun, 2009). The investment method of valuation involves the conversion of an annual income flow from property to an appropriate capital sum. This approach is based on the principle that annual values and capital values are related to each other and that given the income a property produces or its annual value, the capital value can be found (Millington, 1990; Baum, Mackmin, and Nunnington, 1997). The investment method of valuation is based on the principle of anticipation which affirms that value is created by the expectation of benefits to be derived from possession, operation and capital gain at re-sale (James 2015). The basic theory of this valuation method is that no reasonable investor acting prudently will pay more for an income producing property than the present worth of the stream of future incomes or benefits derivable from the property, taking into consideration the risk in acquiring the property and the level of returns required (Elekwachi et al, 2016).
In Nigeria, banks and mortgage institutions lend to developers and investors in real estate. When doing so, they also need the services of a property surveyor and valuer who will assess the value of the borrower’s property to tell them how much money will be made available as a loan to these developers or investors. The property is used as collateral for the loan, whose value is being calculated. The underlying principle in secured lending is to assess the value of the asset on which the loan is based, and to ensure that the former is greater than the borrowed amount. The degree to which the asset exceeds the loan offers the margin of the asset cover, or the value ratio of the loan to-. The investment valuation approach requires the conversion of an income flow from property to a suitable capital number. The approach to value assessment is based on a sound theory and process that relies on consumer behaviour. Ogunba (2013) have noted that the investment method of valuation is based on the principle of anticipation which affirms that value is created by the expectation of benefits to be derived from possession, operation and capital gain at re-sale. The principle according to him, uncovers the relationship between anticipated earnings (rental income) and value for comparable property types. There are numerous reasons about the suitability or credibility of investment method. Chief among them is the fundamental issue of assessment of the monetary worth of the interest in property and not the physical structure or land (Kalu, 2001). The investment method of valuation has three primary variables in the determination of capital value as rental value, outgoings and yield. The method is used mainly for income producing properties and is being examined in this paper to know how reliable and applicable in valuing properties for mortgage purposes.