PMRD 10011: ECONOMICS AND VALUATION SEEN PAPER 21 MAY 2020

PMRD 10011: ECONOMICS AND VALUATION SEEN PAPER 21 MAY 2020

CALCULATE AND JUSTIFY THE VALUE OF HIGH RISE HOTEL

The capacity has 250-bed rooms along with a 150-cover restaurant. The hotel is a four-star. The hotel ARR=£250  and has an average spend of £20.

Price is what is stuck between the buyer & the seller. All land is registered at the land registry; the price of all real estate is recorded when the land registry registers the land.

Valuation is an assessment of what the property might be worth. It is an assessment of value.

The real estates are characterized by commercial,industrial,residential,recreational,public ,institutional ,agricultural,transport and heritage .The terminology RICS-Glossary of terms (RICS-valuation professional standards –The Red Book).To justify this, we use a comparative approach whereby: This method compares likes for likes. Units of comparison are made and examples of similar factors to be considered, for example, location, date, size, interests, lease term. Adjustments are then made because two properties cannot be the same.

The following steps are adopted :

The location of the property:  CITY

Size: 250-bed rooms and 150 –cover,4star hotel.

Identify a similar property: Establishment unit of comparison that is rent, selling price, and dividend by the best comparable area.

Make necessary adjustment on the unit

Multiply the unit of comparison by the area of the subject property.

Using the data obtained from the Estates gazette web site(www.egi.co.uk),

COMPARABLE EVIDENCE

A comparable can be defined as an item of information used during the valuation process as evidence to support the valuation of another, similar item. Comparable evidence comprises a range of relevant data used by the valuer to support a valuation.  This states that the buyer of an item would not pay more for it than the cost of acquiring a satisfactory substitute. Therefore, a person assessing the price to pay for a particular item will normally look to the price achieved for similar items in the market (the comparable evidence) and make a bid accordingly

Ideally, comparable evidence should be:  comprehensive. There should be several comparables rather than a single transaction or event very similar or, if possible, identical to the item being valued • recent, i.e., representative of the market on the date of valuation the result of an arms-length transaction in the market correct consistent with local market practice and the effect of underlying demand, i.e., comparable sales have taken place with enough potential bidders to create an active market. Similar evidence underpins the valuation of almost all traded assets. Provided the above criteria are met, it should give an accurate indication of value. Challenges arise when considering assets that trade in less active markets and where there are significant differences between the assets providing the evidence and the asset being valued. In such circumstances, the evidence available may not be directly comparable. Therefore, it will need to be analyzed and reconciled for it to be used in the valuation. This is often the case for real estate. In such circumstances, the skill and judgment of the valuer assume much greater importance. In this instance, there is no sufficient information to support the method. Therefore, we result in using the Profit method of valuation.

THE PROFIT METHOD OF VALUATION

They were used for income-producing properties.

They were used where comparison/income method is not available.

It is used when the physical buildings are usually sold as part of a business and typically when the buildings are constructed solely for that type of business and could only be used for an alternative business after substantial alterations. It is used in  Examples would be Hotels, Golf courses and other purpose-built sport and leisure centers, Petrol stations and  Some restaurants.

The following steps should be adopted :

Steps involved – Profits Method

The first step is to establish the level of fair maintainable operating profit (FMOP).

Capable of being generated by a reasonably efficient operator (REO).

Derived from an assessment of the fair maintainable turnover (FMT)

Major city-center hotel comparison

COMPARISON 1

The property is a high-rise hotel, which has recently opened in a major city center. It has 250 bedrooms, along with a 150-cover restaurant. The hotel is 4-star.

COMPARISON 2

Valuation of a 50-bedroom hotel

The property is in a provincial city.

The Comparable method of property valuation compares projects of similar sizes, but this can only occur in the presence of all the required information. The profits method can be used if you cannot generate enough comparable data to determine the value of a commercial property.

To be in a position to use the profits method, however, the property itself must have an operational business currently running from within it. Commercial properties, for example, hotels, guest houses, pubs, and cinemas, are typical examples where the profits method of property valuation is suitable.

In some instances, there isn’t sufficient or good quality comparable evidence available, which can cause valuers problems.

A unique one-off property, for instance, or a property that has lots of unusual or uncommon characteristics would make it difficult for a valuation surveyor to use this method as there are unlikely to be any comparable transactions that they can use to compare property values.

If this scenario applies to your commercial property, the profits based valuation method may be more appropriate.

This justifies the use of this method in determining the value of the High Rise Hotel.