Valuation

The Valuation Terminology used by the Professional Valuers in Kenya are similar to those used by other valuers worldwide and who subscribe to the International Valuation Standards Committee.The Institution of Suveryors of Kenya (ISK) does subscribe to IVSC.

1: Current Market value: The definition is that settled by the International Valuation Standards Committee (IVSC). It means the basis of all the valuation concepts discussed here below:

'Definition': The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing between wherein the parties had each acted knowledgeably, prudently and without compulsion.

'The Estimated Amount': Refers to a price expressed in terms of Money (normally in local currency) payable for the asset in an arm's length market transaction. Market value is measured as at the date of valuation. It is the best price reasonably obtainable by the buyer. This estimate specifically excludes an estimated price inflated or deflated by special terms or circumstances such as typical financing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale, or any element of special value.

'An Asset should exchange': Refers to the fact that the value of an asset is an estimated amount rather than the pre-determined or actual sale price. It is the price at which the market expects a transaction be completed on the date valuation.

'On the Date of Valuation': Requires that the estimated market value is the time-specific as of a given date. As markets and market conditions may change. The valuation amount will reflect the actual market-state and circumstances as of the effective valuation date, not as of either a past or future date. The variation in price that might otherwise be made in a market value transaction.

'"A willing Buyer': Refers to one who is motivated, but not compelled to buy. This buyer is neither over-eager nor determined to buy at any price. This buyer is also one who purchases in accordance with the realities of the current market and with the current market expectations, rather that on an imaginary or hypothetical that cannot be demonstrated or anticipated to exist.

‘A willing seller’ is neither an over-eager nor a forced seller prepared to sell at nay m nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the asset at market terms for the best price attainable in the open market after proper marketing whatever price may be.

‘In an arm’s-length transaction’ is one between parties who do not have a particular or special relationship (for example, parent and subsidiary company or landlord and tenant) which may make the price level uncharacteristic of the market or inflated because of an element of special value. The value transaction is presumed to be between unrelated parties each acting independently.

‘After proper marketing’ means that the asset would be exposed to the market in the most appropriate manner ort dance with the market conditions.

‘Wherein the parties had each acted knowledgeably and prudently’ Presumes that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the asset, its actual and potential uses and the state of the market as of the date of valuation. Each is further presumed to act for self-interest with that knowledge and prudently to seek the best price for their respective positions in the transaction. Referring to the state of the market at some later date may assess prudence.

‘And without compulsion’ establishes that each party is motivated to undertake the transaction, but neither is forced or unduly coerced to complete it.

Open market value is the valuer’s opinion of the best price that would have been obtained in the market on the date of valuation. This is, however, subject to the exclusion of any additional bid by a prospective purchaser with a special interest; not a ‘fair’ price, or an average price or the price that the vendor thinks ought to be achieved.

Evidence of open market transactions:
Generally, open market valuations are based on evidence of open market transaction in similar property. A valuation, however is an exercise in judgement and should represent the valuer’s opinion of ht price that would have been obtained if the property had been sold at the valueation date on the terms of the definition of Open Market Value. The valuer may not be bound to follow evidence of market transactions unquestioningly. He/She takes account of trends in value and the information available to him/her, whether or not of directly comparable transactions, adjusting such evidence to reflect the OMV definition and attaching more weight to some pieces of evidence than others, according to his/her judgment do.

In a poor or falling market it is sometimes said that there are a few’ willing sellers’, that most transaction in the market are the result of forced sales’ and that prices paid in such a market are not truly representative of Open Market Value.

The art of valuation often involves subjective adjustments to evidence of transactions that not wholly comparable together with interpretation of trends in value. A valuer must exercise skill, experience and judgement in valuing and in making an open market valuation (or a property for which it is thought there would have been a market) in absence of any direct transaction evidence.

2. The current market value for mortgage purposes:
In the past a term ‘mortgage value’ has been loosely used which to the best of our understanding does not represent a value per se but instead denotes a purpose. The definition of an open market value understood under these terms is a basis for use only when valuing for lending purposes presupposes a value returned with the interest of the lender anticipating a sale in the event of default and the difficulties involved in the eventual sale of the properties held as security.
At times a value for this purposes is calculated at less than 50% of the current market value depending on the estimated degree and extent of the risks anticipated. In Kenya, real estate is governed by several intricate, sometimes un-quantifiable factors as opposed to economic sense, laws or traditions. Certain properties in the rural areas though may have open market values; that is, they can sell or can b sold. However, due to the complex land tenures and underlying traditional practices/beliefs, these properties may not in fact posses a value attribute for mortgage purposes and may be considered altogether to be irrelevant for banking purposes that is where a forced sale is envisaged.

Here valuers may recommend on open market value considering all that is said above but the actual base figure that the lenders may opt to grant their clients may be solely be determined by the lenders themselves in accordance to their lending criteria.

3. The estimated market value for forced sale purposes:
Again this is a defined in exactly the same way as for an open market valuation except that he vendor has imposed specific terms for ht disposal of the security held. Similarly to (2) above, this is a valuation for a purpose rather than a basis considered as a pessimistic opinion. This commences on similar principles (OMV) but the value is determined from a certain margin equivalent to the estimated price at which a property may be expected to be sold at an ideal auction which derives such sale the benefits of a current market value as discussed above. The vendor (auctioneer) is determined to sell the property at a restricted time, sometimes price( reserve) regardless of the nature of the property or state of the market as per the client’s (lender) instructions. The vendor determines when to sell, where to sell it, or even at times who to sell it to (private treaty).

Here the value recommends an estimated price that the property should sell based on the prevailing market conditions.

4. The estimated reserve price:
Under this the other terms used but understood to imply the same include estimated realization and restricted. The concept adopted here is similar to ( 2&3) above except that he lender has determined the minimum price at which the property should be sold at an auction as a safe guide to auctioneers and as a yard stick for fairness for the parties involved.

In both last ncidents, the valuer only estimates what may be a fair price based on the prevailing market conditions occasioned by past evidence, experience, etc.

5. Investment value:
This denotes a valuation carried out on the open market valuation basis as described above where the emphasis is on the series of incomes’ that the property may generate over a period of time. This may be applied where valuation is being carried out on a commercial or residential property where the investor sole concer is the income(rent) that the property is expected to yield. This may similarly be applied while valuing cinema halls, commercial schools or colleges, etc. Where there is no likelihood of nay income being generated lia a ‘lavish rural home’ in Kenya, the investment value in terms of economics is negligible.

6. Insurance value or re-instatement cost:
The valuation for insurance purposes is predicted upon the actual cost estimate of putting up a similar/comparable development in the event of a partial or complete property loss or to the cost of restoring the same to the original condition or status. This concept disregards the open market value concepts (forces of demand and supply) but also relates to the rental compensation during the reconstruction period or the opportunity cost of hiring alternative premises. The basis is carried out on the depreciated current replacement cost (DCRC) approach discussed below.

7. Depreciated Replacement Cost:
A method of valuation which is based on an estimate of the current market value of land for its existing use plays the current gross replacement( or reproduction) costs of improvements less allowances for physical deterioration and all relevant forms of obsolescence and optimization. The result, which is non-market value but is referred to as the depreciated Replacement cost estimate.

8. Capital cost/capital value:
Occasionally, a valuer is requested to ppprovide a value for properties that are rarely offered in the market for sale considerations, for example public utility, unique buildings or development in rural set ups. The concept adopted here is the gross current replacement Cost approach as described under 7 above.

9. General Recommendations:
In their seminar held on October 16, 1990, the valuers appreciate the banks concern on the day today valuation terminology which they have become accustomed to while receiving instructions from the banks requesting for open market, mortgage forced sale and reserve prices.

As discussed above the basic approach in virtually all valuations that a valuer encounters the open market valuation is the basic concept from where other estimates like the estimated reserve (restricted) prices/forced sale values are based on. The valuers have therefore appealed to the banks to in future adopt the two concepts; open market value and the estimated reserve/restricted/forced sale prices while issuing instructions for valuations. The valuers will then in future provide two valuation figures in their reports as discussed here.