Real Estate Valuation in Nigeria - From time immemorial, putting a price tag on values as landed-property has never been a cakewalk. The many factors that must be taken into consideration point to the singular fact that a landed-property can only be correctly valued by an estate surveyor and valuer.
At its core, real estate valuation is a report which contains the present monetary value of a landed-property (as determined by market forces), property types, number of bedrooms and bathrooms, other technical features and the estimates of properties with similar features in that geographical area.
Without exaggeration, the danger of an inaccurate valuation is catastrophic; it threatens the overall credibility of property valuation, puts doubt in the mind of investors and puts performance measurement for landed-properties in jeopardy. When executed properly, a valuation report can serve as a proxy for transaction prices. This is of great value to professionals in the financial services, investors of like-minds, property owners and the economy in general.
While it is true that proper valuation can only be properly executed by an estate surveyor and valuer, this does not in any way exempt laymen (especially individuals with interest in the real estate industry) from familiarizing and understanding the basics of property valuation. Without delving into technicalities, below are some of the key points that everyone interested in the real estate industry must know:
- Cost of construction: When valuing a real estate property, the cost of constructing that building is one of the first things that are taken into a consideration. In a stable economy, the construction cost plays a great role in determining the monetary value of a property.
- Value is constantly in a fluid state: As you might have guessed, the values of landed-properties are always in a dynamic state. It is at the mercy of the market forces at all times. As we have seen repeatedly, a property’s value is not necessarily a function of its cost. Properties that initially command a value way higher than their entire cost of construction and maintenance can also experience a dip in value if the market forces swing hard.
- Investment properties command higher value:
Unlike residential real estates whose values are majorly influenced by the cost of similar properties in that location, valuation methods for investment properties are more diverse.
Below are the valuation methods for investment properties:
- The Income approach: This approach values properties based on the propensity to generate income. The higher the returns they generate, the higher their monetary value.
- The Cost Approach: As the name suggests, this approach values properties based on the cost incurred in acquiring the land and putting the building to its current stage. This method is usually applied on structures (Hospitals, schools and government buildings) that are not easy to sell.
- The Sales Comparison Approach: This approach uses the sales price of similar properties in that location to give an estimate of the real estate property. The property being compared must share lots of similarities before the comparison can be valid.
- A healthy economy, a healthy price: The broader economy plays a significant role in determining the value of real estate properties in Nigeria. In a healthy economy, there is more money in circulation and the purchasing power is high. With more money in circulation, landed properties are able to command better monetary value. The opposite can be said about the monetary value of real estate properties when the economy is unhealthy.
- Government policies: Government decisions can influence the value of properties in multiple ways. For instance, mortgage institutions in Nigeria charge between 19 – 24 % depending on the risk volume. Commercial banks charge higher (minimum of 22%) for mortgage-related loans because real estate is considered a high-risk investment. While the interest rate of the Federal Mortgage Bank of Nigeria is significantly lower (from 6%), it is usually overwhelmed by lots of subscribers, avoidable bureaucratic procedures and a poor allocation system.
As expected, a building constructed with a high-interest loan will cost more than that which is built with a single-digit interest loan.
All over the world, the factors determining the value of real estate properties are similar. However, the difference in economic strength makes property valuation more volatile in Nigeria. Evidently, the cost of construction and location are two of the most important factors that could tilt the value of a property in any direction. Just like the other variables, they are not absolute determiners.
What is the preferred method for pegging a value? When does it change? How is the future value estimated? These and many more questions of this pattern can only be sufficiently addressed by an experienced estate surveyor and valuer. If you will like to know more, contact us at Lansar Aghaji & CO via any of the contact options provided on our contact page.
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