Report on the main factors that affect property values and the main methods that are used to value property.
Introduction
This report seeks to understand the main factors that affect the value of a property or properties. The main methods used by valuers in producing a property valuation report are then discussed. This report could be utilised by several professionals, property owners and sellers, prospective purchasers, leaseholders and investors.
Property is described in the dictionary as ‘a building or buildings and the land belonging to it or them’, it is also considered as the ability to develop occupy or lease that property to other parties. These properties could be used for a number of purposes generally being dividing into commercial (business) or residential use. This report reviews the economic effects on both commercial and residential property.
Factors affecting property values
To understand how prices of property can fluctuant, the overall economic situations are reviewed on a small and large scale. Economics is the science of analysing and understanding how the population consumes and produces certain goods and services, this being controlled by the wants, needs and wealth of the population or its Gross Domestic Product (GDP). A strong economy increases buyer confidence in the property market.
Where a resource is allocated to a specific use, it cannot be used elsewhere and therefore this is opportunity cost; if land is used for housing it cannot be used simultaneously for commercial property. There is only so much available land in the UK, which can be developed under legislations, law and at a cost, this therefore drives its supply and demand.
The value of a property is affected by individual people and businesses, the study of this is called microeconomics with macroeconomics being the study of how economical decisions affect all areas of the market including prices, government spending and employment or the ‘aggregate activity’.
Microeconomics
Microeconomics affects the supply and demand of property, when the price is lower (either its rental or purchase price) there are likely to be a greater number of people willing to pay this price. This is illustrated on the below graph with the blue line indicating the demand curve. The red line indicates the supply curve and when higher prices can be achieved in the market a greater amount of property will be then supplied to the market. Where the red and blue line meet on the graph this is the equilibrium and the demand for property is equal to the quantity available. When the demand for property rises the blue line will shift to the right (up) as marketers can achieve a higher value for property. The red line will shift to the left (up) when the price of a product rises, and the quantity is increased but everything else in the market remains the same. In general, the UK housing market is considered to be rather inelastic with demand not hugely affecting the market when there are price fluctuations, due to the small amount of stock being marketed.
Image 1: Supply and demand chart – applicable to all areas of production.
Individuals within the population affect property values by their demands with the desire of London’s entertainment and work prospects driving residential property prices up. Studies indicate that an overall average price of £620,923 is sought for houses in London compared to the area of East Midlands at £213,040 (Right Move: London House Prices). Another customer choice and preference for residential property discovered that housing properties in rural areas demanded a higher value than those in the city by over a fifth of the price (Halifax Rural Housing Review in 2015). Perhaps a quieter environment with larger outside spaces being the driving factor in this choice.
Derived Demand could be referred to when considering commercial property and considers the capability of a site for providing a yield with its present and future use potential. When reviewing a site, the investor may consider accessibility to labour force and transport links, a site in a more suitable location may gain a higher rental yield than a similar property in an isolated location. For example, a retail outlet in a rural location would not perform as well as in a location with a greater population, bus and road links. Land use for commercial purposes is driven by profit and where a greater yield can be secured; investment may facilitate business needs by providing buildings, refurbishments or plant and machinery to enable growth. Competitive bidding between developers may drive the value of a property higher, this is because they are reacting to the needs of occupiers and investors.
Other effects upon the value of property lie in the fact that urban areas are now heavily built up with space being scarce, rents and taxes are higher along with the introduction of congestion charges mean that out of town facilities may become more desirable. Further changes in communication methods and fast broadband may mean that home working becomes more popular and less office space in then required in urban areas, reducing the value.
Macroeconomics
The demand for property and therefore property value could be affected by a number of larger factors including; GDP, government levies, inflation, population habits and employment levels.
Property values were affected greatly in the recession of 2007/8 continuing until 2013 and according to Nationwide Building Society, house prices fell by 15.9% in 2008. The cause of the recession was termed the credit crunch, where banks and lenders reduced the amount of available credit to prevent the risk of unrepayable loans. This recession affected worldwide markets with a long period of recovery. At this point the UK cut base interest rates to encourage buyers and for the market to continue, this had little effect with buyers remaining cautious. The recession also affected UK unemployment rates with an increase, The Office for National Statistics recorded unemployment for over 16s at 8.4% Oct/Dec 2011, whereas this figure in 2007 was at 5.2%. Employment levels affect property values with increased social renters and less expendable cash not only for property (deposits and mortgage security) but for the products of commercial venture, therefore reducing their profit and ability to expand.
On 1st April 2016, the Government amended its stamp duty policies for tax paid on property purchases. This amendment means that any private residential home purchases should pay an extra 3% on top of any stamp duty due, however stamp duty for first time buyers was removed. This move was made to persuade more first-time buyers to purchase a home and reduce properties being purchased for rental by private landlords. This affect reduces the value of a property to a private landlord with a higher overall purchase price. Government rulings on Health and Safety and Building Regulation standards can affect property prices where improvements to conform may be required, for example private rental properties have a higher standard required than owner occupier homes.
Commercial properties, especially retail outlets and the high street have been affected over recent years with the increase in online shopping at over 18% of all trade and worldwide consumers changing habits. As retail spaces become redundant with now over 10% on the high street now empty; following businesses falling into administration and unaffordable rents, there is now a surplus of units. This influence requires landlords and investors to react to the changes with reduced rents or reinvent their product (property) at cost i.e. convert to housing or another use.
Methods used in Property Valuation
The property market is described as ‘imperfect’ as it is not always easy to gain all the information about previous exchanges and sales, making comparable values hard to make. The real estate market revolves around high level transactions in permanent and fixed locations with differing circumstances, this varied nature is known makes a heterogenous supply. It is rare, except for mass estate developments that any property would match another and even a new estate may have variances in the view and facing of a garden, perhaps affecting the value. Other issues with the property market are the buyers and sellers, who potentially have a low level of knowledge about property. There are a limited number of buyers and sellers for each type of property further limiting sales potential and knowledge pool, some types of property are sold very rarely and are unique in their nature. Still property will always be purchased and to year ending June 2018; 865,913 property transactions were recorded by HM Land Registry. Property forms a huge sector within the economy with a growing population Requiring housing, retail stores, entertainment facilities and places to work
Property valuation seeks to provide a purchaser and seller with a price for an exchange of the property, although value can be relative to certain parties as the property may be a scarce and individual site or maybe able to provide a greater yield to a certain investor than another and therefore they are willing to pay more than another. Valuation of a property seeks to provide a sum that can be agreed on when a willing buyer and willing seller exchange on the open market either for rental or purchase. When reviewing the investment value of a property this seeks to understand the objectives of an investor and could be valued differently to individual parties. In the circumstances of a compulsory purchase for example farmland receiving compensation for disruption and loss of farmland caused by the route for HS2; a fair value is then provided, which means the site may not reach the open market and the agreed price may only affect the parties involved.
Values can be used for providing insurance quotes should a property be damaged. Valuations will be used by mortgage brokers in determining whether the value paid could be recovered should the purchaser be unable to meet the repayments of the loan and therefore their finances are protected. Properties used for commercial purposes also require regular reviews to ensure that the business rates are correct.
Valuation methods are regulated by RICS and they provide guidance on best practice and rules for valuers in the guide: Valuation – Global Standards 2017 (the ‘Red Book’). Valuation should be carried out with a view and investigation into the competitive market.
Value can be determined by analysing features of the property including its geographical position, use, legal rights, physical factors and the economical considerations. Detailed surveys, investigations and measurements all contribute to the information provided within the valuation report and are used to provide the guide price.
Geographical affects include the local character of the area and location in relation to the city or rural atmosphere all affect the value, the more popular an area as a location i.e. London Global Cities Report, 2018, London is the second more influential capital in the world behind New York, although this may change following Brexit. This draw of the city not only to workers and tourist increase the value of this location as a whole. London also has surrounding infrastructure including six international airports, rail networks, roads and motorways and the London underground. This existing infrastructure enables easy commuting to places of work and allows access to the nearby facilities, new infrastructure such as HS2 may improve the value of locations along the route, where links are provided between London and other cities, especially Birmingham which will then be in the commuter belt for London. The situation of each property will be understood to calculate a value, which is reasonable for its circumstances.
Where a site is subject to environmental issues i.e. contamination, flood risk, mining/ quarrying risks, this should be taken into account as the property may have increased risks, higher insurance premiums and be considered undesirable. Mitigation measures may be requiring where a derived obdurate demand is sought from a property, contaminated sites require tests and clearance prior to the commencement of some developments to ensure safety for all future occupants, this reduces future profits with the need for expensive site works
Another example would be in the introduction of fracking in the UK, could cause a devaluation in property prices (mainly residential) due to the increase in transport to sites, risks of minor tremors from seismic activity felt in Lancashire and risk of pollution. As this activity is new to the UK the effects are unknown, although a Government published article in 2014 called Shale Gas: Rural Economy Impact has sections discussing a report about Texas from 2010, which found that houses within 1proximity of a well had their values decreased by 3% to 14%. Other economic studies were thought to have concluded anything from a small positive impact on property prices for homes within 2km of wells to a drop of between 4% and 7% for homes within 4km of sour gas wells and flaring oil batteries in Alberta, Canada.
Planning approval on a site including its existing lawful use and its proposed use can affect the value of a plot and the initial valuation may require confirmation that the property has been built in accordance with its planning permissions and that no material change of use has occurred. Int the case of works to listed properties carried out without permission under legislation these can be subject to a monetary fine or possible prison sentence. An article in the City Metric discusses the differences in the land value of a site without planning permission compared to land with permission to develop, the article concludes that; around Cambridge, agricultural land with no planning permission was worth around £18,500 a hectare in 2010; residential land was worth £2.9m. Around Belfast, agricultural land was assessed at an average value of £24,000 per hectare, compared with residential at £1.25m. which is reliant on UK Planning Law and prospective development could increase the overall value.
When valuing a property, the legal rights should be reviewed and understood, including any existing leases, covenants, easements and compliance with building regulation guidance. Covenants could be positive, meaning that some action is required and should not affect new landowners or restrictive meaning that future owners may not be able to use the land in a certain manner. A restrictive convent may not allow future owners to keep animals on the site or use the premises for business use, reducing the future options for development at the property and therefore the ability to profit. Covenant’s may be released at a cost through discussions with the party who benefits from its restrictions or legal action may be attempted through a court process, again at a cost to the party seeking to remove the covenant. Some properties when sold and transferred may be subject to an uplift clause, where the previous owner is to receive a sum of money (normally 25%) from any future developments within a site, up to a time limit; normally 25 years from the sale. An uplift clause again can affect the future profits from an investment property and may reduce its overall value to an investor.
Physical Factors of a property affect its value and a building should be measured along with dimensions and areas of the site. Industrial buildings are sold and rented on the square meterage, therefore the size is an integral part of a valuation. Other physical factors include the nature of the buildings and how they are constructed; a better-quality build with a longer life span will have a greater value than a building requiring maintenance and works, therefore defects should also be required. The value of a building does not normally require a structural survey, nor does the report supply this but it does take a view on repairs required and the buildings age.
Where fixtures and fittings are to be retained with the transfer of the property through either rental or sale this should be considered within the value along with any plant and machinery. Surplus items to the property will provide an increase in its value, if required by the future users of the site, these also form additional assets to future users/investors. When valuaing a site, services should be considered as installation costs to provide gas, drainage, water and electric could require large financial investment before the site could be utilised as intended.
A valuation should review economic considerations of the property for example its running costs in gas, water and electricity. Information regarding business rates provide the valuer with further detail on the property, rates are calculated on the ‘rateable value’ of a property and varies depending on its use with some exemptions applying to certain properties. Where a payment is required this is calculated in accordance with the square meterage of the property. Other economic considerations include previous rental payments received providing a guide to future earning potential and when outlaid finance may be achieved in return.
Conclusion
Property valuation is a science or an art, requiring research, understanding and thought on a number of matters and influences relating not only to a property internally and externally but its surroundings and wider influence of the economy in general. The guide ‘value’ may be different to individuals when considering their needs, wants and investment potential. The property market is vast, and the goods expensive requiring knowledge from the valuer and compliance with the guidance provided from governing bodies.
4.3.2019