Real Estate Investor Magazine South Africa April 2015 | Page 41

INSIGHT

Inside the mind of a

Valuator

Finding the value of an
investment property… Part 1
BY RICHARD WADE

Y

ou have done the hard work and have found
your ideal investment property. You have
approached a bank and they have agreed to
fund your purchase, in principle, subject to a market
valuation of the property to ensure their loan-to-value
ratio is sound. A valuator then arrives on the property’s
doorstep. If you believe estate agents, the value of
the property can be justified by the mantra ‘location,
location, location,’ whereas your valuator will be
thinking ‘location, condition, lease,’ of which the most
important is the lease.
The value of an investment property is it’s income
capitalised over the period of the lease. This produces
an impressive formula. However, whilst location is
important, no valuator will compare an investment
property with the one next door without knowing
how much income it is producing. The fundamental
elements of income are worth examining in more detail
to understand how a valuator thinks and reaches
conclusions.
How is it calculated?
It can be based on per unit of floor space, such as offices
or industrial property, on bedrooms, if residential, or
on projected profitability, such as hotels or restaurants.
Projected profitability is by far the most volatile
because of the number of constituent variables that
make up the income (e.g. for a hotel - occupancy, room
rates and seasonality). So, beware the hotel investment
room masquerading as a pseudo-one bedroom flat.
Valuators will make deductions from income to allow
for ‘voids,’ which are the periods when your property is
unoccupied and not earning you a return.
The post-recession property market has seen a move
towards quality across all sectors. The reason why poor
quality secondary property seems cheap is because few
tenants want to rent it and even fewer investors want
www.reimag.co.za

to buy it. For example, the location of the Tulip Hotel
in Cape Town CBD was very good, but it’s condition
was so poor it was beyond repair. It was demolished on
28 February 2015.
Valuators will make various deductions. Operating
expenses will be deducted from the market-related
income. This is based on an estimate to the extent at
which rent may not wholly reimburse current levels
of rates, property insurance, management fees, repairs,
maintenance, utilities, legal and accounting expenses.
In additio