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• Lenders
• Shopping centre owners and operators and • other speialisSandcmsultanS. This paper aims to
examine the valuation of Teal estate prices, using prediction strategy based on selection of the
best fitting model for use. The objective of the paper is to review the various methods used in
For any valuation to have validity it must produce an accurate estimate of the market prize of the
property. The model should therefore reflex the market culture and conditions at the tine d the
valuation. It should be remembered that the model should be a Tepresentatim of the underlying
fundamentals of the market. This, in the property market, what is often called a 'valuation" is the
best estimate of the trading prize d the building. In this confect, the following convention is
adopted:
• Market value is an estimation of that price were the property to be sold in the market and
• calculating of worth is used to assess the inherent worth to the individual or group of
individuals
In many property markets it is common place for the ownership of property to be separate from
its use. Often the price of exchange will be the same whether the purchaser has investment or
occupation in mind, but nonetheless the view of the two groups et bidders will be different. An
investor will view worth as the discounted value of the rental stream produced by the asset,
whereas the owner-occupier will see the asset as a factor of production and assign to it a worth
derived from the property's contribution to the profits of the business. No doubt both groups of
bidder will also be mindful of its potential resale price to purchaser from the other group.
The concept of the worth of a property is most important in markets that are underdeveloped in
terms of liquidity and the separation of ownership and rights. Here most transactions are based
on owner-occupier views of the worth of the property, i.e the contribution it will make to
business profit, as well as subjective issues such as statusand feelings of security. Valuers. with
hardly any transaction evidence, can only attempt to replicate these calculation of worth in
One of the paramount concerns of the valuation profession is the need to ensure that information
presented to a client is dear and unambiguous. Not only should all parties understand the
terminology used, it is also important that the client receives all other in that might be required to
make a rational financial or investment decision. The latter point does not only concern the
semantics of definition of exchange price (see below), but must also address the issue of
valuation methodology. Given that clients themselves are becoming more sophisticated in the
way they determine whether to buy or sell property, then the pricing model used to access the
most likely exchange price should reflect their thought process. This requires the valuers to
better understand the client's requirement; and leads to the adoption of more' advanced valuation
A definition of value is an attempt to clarify the az(mmptions lade in estimating the exchange
price of a property if it were to be ,old in the open market. That aammption; can include the
rrature of the legal interest, the physical comitko of the building, the nature and tuning of the
;market, and assumptions about puss Me purchasers in that market. Given that a compelling
rason for wing market value definitions is to enure cora.stency in the irccea of valuation, it is
important that that is a consistency of definition in all countries. For this reason, the International
Valuation &arida nk Committee (IVS. e has set a istendard" to provide a annum definition of
market value. Market value isa representation of value in exchange, Cr the amount a property
would bring if of feral for sale in the open market at the date of valuation ender circumstances
that nett the requirements of the market value definition. In order to estimate market value, a
valuer must first estimate the highest and best we, or meet probable we That we may be a
continuation of a property's existing use or some alternative. These determinations are made
from market evidence. Market value is estimated through the application of valuation methods
and procedures that reflect the nature of property and the circumstances under which the given
property would most likely bade in the open market. Market value is defined for the purposed the
standards as follows; Ntrket value is the web:maid icracut he which are went chould exchange on
the dale of whereto &queen a waling buyer sue a waling seBar in xi antic kreth traSaCtiOn ate:
proxy :wading wherein the partite had each acted knowledgably, prudindy and wither! coagulant.
This paper reviews the various nailxxls available to the valuer to estimate market value.
Methods Fade country will havea different culture and experience, which will determine the
methods adopted for any particular valuation. The majority of all methods will rely upon some
krm of comparison to assess market value. This may be done, in its simplest fern, by direct
capital comparison or may rely upon a range of observation; that allow the valuer to determine a
ngrasion model. Any ach method is Manuel to in this paper as "traditional'. Other models or
method; try to analyse fir mat by directly mimicking the thought pnxraes of the players in the
market in an attempt to estimate the point of exchange. These models tend to be more quantitive
in method and will be referral to as 'advanced'. For each method (or apprced0 that is darn bal
blow, its theory is lriefly — explained together with an outline of how it is alpha] in the
valuation process. The appropriate economic principles are also quoted with an explanation of
how they apply toea& method. Method; can be growxyl as follows: (I) Trak Fiona! misted=
method. (2) Advanced valuation methods • artificial neural networks(ANN1/2); • hedonic pricing
method; • spatial analysis methock; • fu2zy logic and • autongnesive integrated moving average
(ARIMA).
Traditional valuation methods Comporatle method Sala comparison is the most widely used
apprcech. The value of the property being appra lied (called the abject property) is assumed to
relate closely to the selling price; of similar properties within the same market area. The appraier
first sclera several similar properties (compambles or simply comps) from among all the
properties that have recently been sold. Since no two properties are identical the appraiser mat
adjust the selling price of cede comparable to account for dif ((Tenets between the abject a nd the
compa rabic, i.e differences in size, age. quality of comtrud ion selling date, surrounding
neighbourhcod, etc. The amnia,- infers thecurrent valueof the abject from theadjuded sales prices
of the comparables. The sales comparison upprcedt is heavily dependent on the availability,
accuracy, cownletamx;, and timelines of sale tramaction data. Information advantage of being
spread all o'er the QUC, as opposed to bungalows (one-story, ddachal, houses) and to
condoeninium units, found mainly in antiurban areas in the former cat and in central
neighbourhoods in the latter. Sal prices of sampled cottages raw from $50,030 to $ 0,000, with
man price standing at $123,1&3. Many attribute; are available to describe these tranmetfims.
They can be grouped as follows: • transaction attribute; (mainly sale price, thedependent
variable} • property specifics (66 attributes in the initial data set; 2 selected during stepwise
ngresiionanalysis -models A to D) load taxation attribute; (lwo available; two selected by the
model - model; A to D); • neighbotrhood attributes (34 rdat he attributes -models C and D); •
proximity attributes dedgnal at capturing externalities (19 initial Variables- =deli B to D); and
travel accessibility measured on the street network (15 provided -model I)). Following a five-step
approach, property specific; are first introduced in the model; proximity awl neiglbourhood
attribute; are then alcassively added on. Finally, factor analyses an, performed on each set of
access and cams variables, thereby reducing to six principal wmponents an array of 49 individual
attributes. Subt4ituting the melting facers for the initial de;aiptors leads to high model
Advanced valuation methods Artificial neural networks (ANNs) Artificial neural network
models have barn offered as a pcsdble solution to many problem; in real estate valuation. An
artificial neural network model molt first be trained (roma set of data and the model i; then
utilized to estimate the prices of new properties from the same market. Neural networks are
artificial intelligence models originally designed to replicate the human brain's lea ming
prccesses. These modek have tlree primary components: (1) the input data laya; (2) the hidden
layer(s),commely referred to as the box"; and (3) the output nn ur(s) layer, the estimated property
Nalue(p). The hidden layer(s)contain two processes the weighted summation functions and the
transformationfunctions. Both of thole functions relate the values from the input data (eg. the
property attributes: number of bathrooms age of house; lot size; basement area; total area;
number of fireplaces nut of garages) to the output measures (the sales price). The weighted
is: = E (7)
where .k is the input value; and Wv is the meightsamkned to the input values for each of the j
hidden layer nodes A transformation fend ion then relates the • summation value(s) of the hidden
layer(s) to the output variable vale(s) or Its. This tramfommtion function can be of many
different forms linear fend iom, linear threshold fund MN, dep linear functions,- sigmoid
functions or Gaumian functions. Mod software products utilim a regular sigmoid trandonnation
function such as
Yr(8) I +e-Y. This function is prefened der to its non-linearity, continuity, monotonicity, and
continual differentiability properties (Forst, 199Z Trippi and Turban, 1993). That is research
about thee artificial neural network; fa estimating the lue of a random sample of 'bpi-mai'
residential moperties and a sample of outlier propertim. The data used in this re;eardi comid of
298 single-family residential properties that were sokl in Fat Collins, Colorado, USA from
November 1993 to January 1954. The variables that ddermine value were the number of
bathroom, the age of the house, the lot size, the finithed interior square footage of the home,
whether there was a Insement the number of fireplaces, and the size of the mine. The log of the
property sales price was used as the output layer for the artificial neural network model. Outlier
properties were determined as properties that mese-Bed a z-score greakr than 2.0. A z-score was
measured by mbtracting the property price from the average prig of the houses in the ample and
dividing by the :ample standard deviation. A total of 17 outlier properties were identified and
separated into an "outlier' holdoutaanple, leaving 271 properties in the"normal properties (lett sd.
The mmaining 271 properties were sated by mice and every firth property was separated out into
a tnomral' holdout sample, leaving 204 proptrtie; to be the trainingsample fir creating the
artificial neural ndworla. The model with the optimal number of hidden layer mxks would
mesms the minimum mean ahmlute prediction error and the maximum number of houses within
a 5 mr cent absolute prediction error of the actual sales price Six hidden layer node; were found
to be the optimal number of nodes within the hidden layer for the t hme artificial mutat networks
Iledoric Im'zing math The theory of hedonic price functions provide; a framework for the
analysis of differentiated goods like housing units, whose individual features do not have its
highest and best me. Each computable sale should be described. As a minimum, the ckaript ion
mud include the following data: • location • grantee; • grantee; • acceding & • date • tale pricc •
tmderstanding the market value of the land and poperty to the btsinesscan be extended to include
the valuation of development progrty. If one views the proms; of (relevelopmemt as a businem, it
is pcmthle to asset-s the market value of land and buildings in their aiding form as part of that
prccess. Development cc curs where the anent use of band and buildings is not the highest and
bed. By vending money ralewloping the site, it is pct-sible to release latent value,asthe market
value of the land is ineleamd due to the demand for the new we commanding a higher price than
the previous use. By viewing develognatt in this way, it can be seen that the residual method of
valuation is very similar to the profit; method. With the nsidual mdhod, the valuer assesses the
market value of the land in a redeveloped form (either by compariscm or by the investment
method) and deducts from this grins dewlopmtnt value all omits that will be incurred in putting
the property into the form that will command that price. These costs will indude demolition of
the existing building (if not already a deared site), infrastructure world, comt ruct ion costs,
profemional km, finance cods and a ranuneration for undertaking the risk of developmmt
(developer's profit). By deducting these ha bilitie; from the final market value, a residue is
produced. This residue represents the maximum capital expenditure for buying the land. It will
therefore indude all cents of purchase (ta mit ion, legal fees, profemional fees and finance). The
net residual land value is determined by allowing for these additional land cogs. It can be seen
therefore that the residual land value is, as with any economic rent, dependent upon the supply
and demand of the finished product, the developed property. The greater the demand for the
finished property, the higher the gram development value, and if costs ranain relatively static, the
Confraefor'sleosi meihod A further way in which it is possible to es mate the market value of
land and pnperty is the contractor's method or the replacement cog method. If the poperty being
valued is so sperialial that properties of that nature are rarely sold on the open market, it will be
Fimilarly, if there is no rental produced, the invegrnent rnethod will also be inappropriate. The
profits rnethal could be applied if the property i; intrinamlly linked to the boons carrial out in the
property, Inxever, whew that business is one of production (rather than seniai it is difficult to
deterrnine the contribution of the prnixrty to the ova-all triage The plant and machinery
contained within are Hedy to ham a greater value to the business than the structure containing
than. Than, on again, the caber mint revert to understanding the thought prccea; of the Ira of the
building. This can be illustrated by reference to a property such as an oil refinery. here the nature
of the businea; is so sprialisal that there are no comparisons, the property would be owner-
cccupied so that is no rental and the plant and the machinery will be the important elements
contributing to the Nalue of the bwiru. Than, the owner of the building will simply asses the
rnarket value of the building by reference to it, replacement OWL lbw much would it coat to
npkwe the property, if the btsinea; weredeprived of its use? In simple term; market value will
equate to reconstruction emir. The valuer will assess the nrarka value of the raw land (b• nfaence
to ccanparable land mbes in an appropriate alternative tse), add to this value the cog of
rebuilding a new building which could perform the function of the existing gructure, and from
this then make subjective adjugments to allow for the obsolescence and depreciation of the
existing building relative to the new hypothetical unit. It is reasonable to assume that this mirrors
the thought inx:ea; of the owner-crawler and tins skald be viewed as a Valid and rational method
of Valuation. It is interesting that in anintrie; where property investment is less prevalent and
where owner-occupation is the favoured method of property utilisation, then it is not only
sperialisal properties which are Valued by the contractca's method. If there is no investment
market (i.e properties will only exchange between owner-ccamiers in the market) then the price
of exchange will reflect the 'bottom line' cost to the purchaser. This bottom line will be the cost
that will sad to be incurred fora new build relative to the existing property that is on the market.
There will be a strong (=relation between price and cost However, if the occupation market is
dominated by ammanies ratting and that is a degree of scarcity in the market, then price will be
determined not by cost, but by the supply and demand characteristics of the arupd local market
such a case regardle3s of the nature of the property, the invegment method will dominateas the