Anyone interested in land and buildings may require the services of a valuer.

Valuers may, for example, be instructed to advise:

owners on the price or rent they should ask for their property;

buyers on offer prices;

tenants on the rent they should pay;

mortgagees on the value of property for loan security;

owners dispossessed under compulsory powers on their right to compensation.

In most cases the valuer’s role is to estimate the market value (MV) or market rent (MR), that is the capital sum which, at a point in time on specified terms and subject to any legal constraints or restrictions, might be paid for a particular interest in property; or the annual rent at which the property might be let.

Market value and market rent are defined in the International Valuation Standards (IVS), effective from 1 January 2012, published by the International Valuation Standards Council (IVSC).

The services of a professionally qualified valuer with detailed knowledge of the property market is considered to be essential because:

1. the market for property is imperfect;

2. landed property is heterogeneous;

3. the legal interests therein are complex;

4. the laws relating to landed property are complicated.

Property is not necessarily the same for all purposes.

Personal details of a client may be necessary as the value of property may vary for different individuals according to, for example, their tax liability.

The nature of landed property, the method of conducting transactions in it and the lack of public information relating to transactions all contribute to the imperfections of the market.

Apart from possible differences in construction, each piece of landed property is unique by reason of location.

The majority of transactions in the property market are conducted privately, and even when the results of the transactions are known they are not helpful in the absence of detailed information on matters such as the size and state of the buildings and the legal title.

The degree of imperfection varies across the market and whilst firstclass shop investments are relatively homogeneous, because shops in prime locations attract similar tenants, public houses in rural locations will be more heterogeneous due to variations in catchment area and trading potential.

The property market is not a single entity; there are a number of markets, which may be local, national or international.

There are sectors and subsectors such as residential, agricultural, commercial and industrial; markets for occupation and markets for ownership either for owner occupation or for letting.

The market for residential property for occupation is generally local but that for prime property investments is international with buyers, such as insurance companies and pension funds as well as individuals, owning all types of property in all the major cities.

The market for development properties can be local, national or international.

Small sites for the erection of a few houses will interest small local builders or developers, but large sites for residential or commercial development will be of interest to larger organisations over a wider area and sometimes on an international basis.

A definition of value

It is not appropriate to comment on all the definitions and procedures here but merely to provide a definition of value which will serve the present purpose; attention will be concentrated on market value.

Concepts of social value, aesthetic value or other values are not appropriate to this book but it should be remembered that value can be considered from these points of view.

The market value of a particular interest in landed property is simply the amount of money that can be obtained for it on a particular day from persons able and willing to buy it; it is an estimate of the contract price at that time and under those market conditions.

Value is not intrinsic but results from estimates, made subjectively by able and willing buyers, of the benefit or satisfaction to be derived from the ownership of the interest.

In order to value an interest in property a valuer must be able to assess the benefits to potential buyers.

What is valued is not the physical land or buildings but the legal interest which gives legal rights of use or enjoyment of the land or buildings.

Buyers are those who propose to tie up capital in land or in land and building; there are three main angles from which they may view the transaction:

1. For occupation having regard to the personal, social or commercial benefits to be derived from that occupation.

2. For longterm investment having regard to the income (annual rent) expressed as a yield (percentage return) on the capital invested.

3. For shortterm gain or profit, buying and reselling after improvement or repackaging.

These motives are not mutually exclusive; a transaction may be entered into with more than one motive in mind.

The price the buyer is prepared to pay will be influenced by the supply and the demand for that particular type of property at that given point in time.

Supply and demand are discussed at length later in this chapter, but it should be noted here that demand must be effective; that is, it must be backed by money so that the desire to own can be translated into the act of buying.

Value and valuation

Although the aim of the valuer is to provide an estimate of market value, it should not be assumed that each valuer’s opinion will be the same.

Different valuers could arrive at different opinions of value because they are making estimates and there is normally room, within limits, for differences of opinion.

Under stable market conditions, because market prices result from estimates of value made by buyers and sellers on the basis of prices previously paid for other similar interests, the differences should be relatively small.

In times when market conditions are not stable, more serious differences may arise.

Here the valuer’s estimate of value will be based on prices previously paid, but buyers will adjust their bids to reflect market movements since the previous transaction took place.

The correctness of the estimate will, therefore, depend on the valuer’s knowledge and understanding of the movements and their skill in quantifying the impact on market prices.

In any market at any time there may be a number of buyers and sellers, all of whom will have their own views, desires and judgments on the value of the commodity in question.

A market constitutes an amalgamation of individuals or individual companies who will strike individual bargains, so that a “market price” can only represent an average view of all these factors.

Where the commodities are all different, as in the case of property, then the problems of arriving at this average are multiplied.

In the case of statutory valuations in hypothetical market conditions these differences of opinion as to value will become even more marked.

Demand, supply and price

The quantity of property bought will always equal the quantity sold, regardless of price.

This does not mean, however, that price is unimportant.

Demand and supply are in fact equated at a point in time by some level of price.

At any given time, other things being equal, any increase in demand or decrease in supply will cause price to rise; conversely, any decrease in demand or increase in supply will cause price to fall.

Therefore, whatever the given demand and supply, in a freely operating market, price will ration the supply and match it to the demand.

Price has, however, a wider role.

If, over a long period, price remains persistently high in relation to the cost of producing more of the thing in question, supply will be increased, which will gradually have the effect of pulling down price to a long run normal or equilibrium level.

Price acts as an indicator and as an incentive to increase or decrease supply and demand.

The extent of price changes will depend upon price elasticity, that is the responsiveness of supply and demand to changes in price.

If supply is highly elastic, a change in demand can be matched quickly and smoothly by an expansion of supply and the price change, if any, will be small.

Conversely, if supply is highly inelastic, a change in demand cannot be matched quickly and smoothly by an expansion in supply, thus the price change will be more marked.

If demand is elastic, a change in supply will quickly generate an appropriate contraction or expansion in demand and the price change, if any, will be small; but if demand is inelastic this means that any change in supply is likely to generate a contraction or expansion in demand less quickly and the price change will be more marked.

This is a simple statement of economic laws which are applicable to all types of commodity or service, but to consider their application to a particular type of commodity or service it is necessary to look at the special characteristics of that commodity or service.

A separate discipline of property economics has developed to reflect the unique nature of landed property.