The Art Of Valuation

By Harold Ayodo

Not many people understand what valuers consider when determining market prices of property in real estate. For instance, the public was perplexed when three different registered valuation firms gave different market values of the Grand Regency Hotel (now Laico Regency).

The Central Bank of Kenya (CBK) sold the five-star prime property located at the heart of Nairobi for Sh2.9 billion even as realtors claimed it was worth over Sh6 billion.

Before the sale, the CBK engaged three registered valuers — Value Zone, Lloyd Masika and Ark Consultants Ltd — to establish the market price of the prime property. 

Value Zone established the market value to be Sh1.62 billion, Lloyd Masika (Sh1.754 billion) and Ark Consultants Ltd (Sh2.175 billion).

Consequently, CBK set the price at Sh2.91 billion following a final valuation by the Chief Government Valuer. The purchasers paid stamp duty of a whooping Sh80 million

Home and Away sought to find out what professionals consider before pegging market prices on property in real estate.

For starters, valuation is the practice of analysing real properties and developing an opinion on their value using tested and proven scientific processes and methods.

Registered valuers are often required, not only when buying and selling property but also for other purposes including insurance and mortgage.

Others are when banks are advancing loans against securities, reparation in cases of disputes, for court sureties, book value and determination of land rates.

Valuation also comes in handy before the State acquires private property by compulsory acquisition. A valuation report may help to tabulate compensation amount.

Rubyland Limited Chief Executive officer Charles Mwangi says valuation is a preserve of experts.

“Property valuation should only be undertaken by professionals registered with the Valuers Registration Board (VRB),” says Charles.

Variables

He explains that the professionals analyse several aspects of property before arriving at a market price.

“We (valuers) look at the locality, state of repairs and maintenance of the property and soil characteristics,” he says.

Other variables include topography, geological and environmental components, financial factors, prevailing macro-economic and fiscal policies.

“Social, political and cultural factors and a host of legal factors surrounding the instrument of ownership are also amongst our areas of interest,” says Charles.

Even as involving the professionals in real estate transactions are important, prospective buyers on property are perplexed when two different valuers give different market values.

Usingthe case of the Grand Regency (now Laico Regency), Charles explains that a variation in market values by the professionals follows a variety of factors.

“The variables that valuers consider when valuing property keep changing and there are many opinions when interpreting and analysing them,” he says.

Nevertheless, he admits that the margin of error should not be so wide as to arouse suspicion on the credibility of the valuer.

He says different people interpret factors such as location of real estate differently. The variations differ widely when it comes to geographical parameters.

Credibility

“A valuer should always, however, be able to support the credibility of the value reported for real estate,” says Charles.

According to Kenneth Otumba, a valuer, the differences in valuations in the profession may result from many factors.

“Valuation is the art or science of estimating an interest in land for specific purposes...it may not be possible for two people to have a similar opinion,” says Kenneth.

He says that market values may vary but within an acceptable considerable margin.

“Valuers consider different variables and it’s the discretion of the professional to choose,” he adds.

Kenneth explains that there are various methods used in the process but the common ones are the investment approach and the depreciated construction cost and sales comparable method.

He explains that all methods may give different market values and insists on the importance of engaging a valuer before making investments in real estate.

“Valuers not only estimate market prices of property but advice on rental income expected while establishing whether the property is public or private,” says Kenneth.                                                     

He says that registered valuers often issue valuation reports after undergoing their professional processes.

Reports    

“Valuation reports have several factual details like the plot number of the property, date of inspection, location of the property and details on the title deed,” he says.

Kenneth explains that the report also entails social and infrastructural services within and near the property like roads, electricity and piped water.

“We also describe details of the plot, which include the shape, topography and type of soil,” he says.

Valuers also describe the type of development on the plot before winding up the report with the valuer’s opinion and estimate the market value at that time.

“It is paramount to engage a registered valuer in property transactions to avoid making rush decisions that may include selling at a lower value or paying more,” warns Kenneth.