REM 107 Valuation I

Lecture 1

Defining Real Estate

...

land and all things that are a natural part of

the land for example trees and minerals, things
that have been attached to the land for example
buildings and site improvements, all permanent
building attachments for example mechanical and
electrical plant providing services to a building that
are both below and above the ground.
(International Valuation Council Glossary of Terms,
2015)

Defining Real Estate

The

Appraisal Institute (1992:6) defines it as the physical

land and appurtenances affixed to the land, e.g.,
structures.

It

is also defined as land and anything permanently affixed

to it such as buildings (Jowsey 2011:39).

Real

estate is also acquired with an accompanying bundle of

rights, which normally include the right to use, possess,
control, enjoy, exclude and dispossess (Sirota, 2013).

Defining real estate cntd

Real

property refers to land or resources

embodied in land (Harvey, 1992). Neither of
them is physically movable. This makes real
property a specialized type of good different
from other movable goods. Real property is
exchanged in its own market often referred
to as the real property market.

Defining Real Estate

It

can be noted that real estate includes

the land itself, natural resources attached
to the land, human made improvements
and any real property rights that benefit
the owner.

Real

estate is defined as land with all its

natural resources and any human made
improvements on it and attached real
rights.

Definition of a market
A

market refers to any arrangement through which

buyers and sellers are brought together to fix a
price at which goods can be exchanged. For any
market to be functional, the following should be
present:

commodity to be bought and sold

Sellers

willing to sell

Buyers

able to purchase

means for bringing together buyers and sellers

Definition cntd
Examples

of markets include street

markets, produce markets and the stock
market. The real property market is
another type of market but it has its own
characteristics

Definition of the real property market

Harvey

(1992) defines the real property

market as the arrangement by which buyers
and sellers of virgin land, agricultural
estates, industrial buildings, offices, shops,
and houses are brought together to
determine a price at which a particular
property can be exchanged.

Distinguishing characteristics of real

property
In

order to understand how the real

property market functions, it is critical to
understand the characteristics of the
commodity it deals with. Real property is a
specialized commodity hence it has unique
distinguishing characteristics

The Commodity
Land

and buildings are immobile.

Their

supply cannot be readily increased in

response to demand.

Each

property is unique and there is no

perfect substitute.

The market place

There

is no centralised market for property

comparable to the stock exchange or commodity
markets. Instead, the market is characterized by
property agents, who are retained by vendors to
find a buyer and in some cases by purchasers to
find a property. A study of any town will show
that the market place is fragmented by a variety
of agents and also property sold privately.

Finance
Most

purchasers of real property do not have

adequate financial resources to purchase
real property hence they will borrow money
from financial institutions such as building
societies and banks. The level of activity
within the property market is largely
determined by cost and availability of loans.

Imperfect knowledge of the market

Deals

are usually sealed within the property industry

in privacy.

Ownership

and price details would only be known by

the parties to the deal

In such cases, the public will only know about the

transaction when the transfers are being done in the
Registrar of Deeds office

However, it

should be noted that most estate agencies

are now advertising their transactions through the
press and online

Indivisibility and lumpness

Property

is indivisible and that which can be

subdivided would require high costs for its
subdivision.

Small

investors find it difficult to invest in

property except for own occupation, or through
shares in property companies, property bonds,
unit trusts, securitisation or other indirect
means.

Indivisibility and lumpness

As

already pointed out, purchasers resort to

loans from building societies and banks in
order to acquire property and changes in
the availability of such loans has significant
effects on the property market.

Ability to create interests in real property

Real

property as a commodity is unique in

that it is possible to create a number of
interests within one property. For example
in one property it is possible to have the
freehold interest, the leasehold interest
and sublease, mortgages, mortgagors
licences etc..

High costs of transfer

An

investor incurs high costs during the

acquisition of property in addition to the
purchase price. These costs include
professional fees of valuation, estate
agents fees and transfer costs paid to the
lawyers and government.

Inelasticity of supply
Property

supply takes time to respond to

changes in demand due to time taken to
obtain planning permission, arranging
finance, construction of the buildings and
their disposal. Thus due to slow
responsiveness in the property industry, it
becomes abnormally vulnerable to economic
booms and slumps.

Special problems of management

Property

investment is associated with complex

economic and legal challenges. This requires
management skills. It takes time, training
experience, expertise and money on the part
of the investor. The situation is even more
complex where the landlord has to meet
maintenance and repairing liabilities.

Investors in Real property

Private

persons

Insurance
Pension

companies

funds

Charities

and Trusts

Property

Companies

Property

Bond funds

Property

Unit trusts

Building

Societies and banks

Players in the Real Property market

(a) Sellers
Most

property is in use and is only offered

for sale when for various reasons, it has
ceased to serve the function for which it is
held or prices are so attractive as to
encourage a sale.

The

market is mainly second hand. The

amount of new property coming on to the

market is very small.

Buyers

Buyers fall into a number of categories: These are as

follows:

Users who require property for use or occupation, e.g.

buyers of vacant houses, shops, factories, farms etc.

Investors who wish to let to occupiers in return for rent:

This class of buyer is an investor in land and buildings.

Developers who wish to build or rebuild on land and make

a profit in so doing.

Speculators, buying in the hope of selling later at a profit.

Professional advisers
Buying

and selling of property requires the

expertise of agents and valuers who will do the
following:

Advising

on the sale price or purchase price

Advising

on methods of sale- whether by private

treaty, auction or tender

Marketing

the property including sales

particulars, advertising, circulating to applicants

Professional advisers
Negotiating

terms of sale.

Assisting

with arrangements for financing

and carrying out valuations for purchasers
to buy properties for example banks and
building societies.

Liaison

with solicitors in preparation of the

contract for sale and the formal conveyance
and the transfer of the property.

Professional advisers
The

property market is therefore a complex one

which is serviced by a numberof experts namely :

estate

agents, valuers, surveyors, solicitors,

mortgage

brokers and finance organisations. Valuers will

normally act as retained

professional advisers or agents or as in house

employees of major property

owners.

Functions of the Real Property Market

To allocate

existing real property resources

and interests through the equilibrium
market price

To indicate

changes in demand for land

resources and interests

To induce

demand

supply to adjust to changes in

Functions of the Real Property Market

To indicate

changes in the conditions upon

which land resources can be supplied

To induce

demand to respond to changes in

the conditions of supply

To reward

the owners of land resources

Efficiency of the real property market

The

real property market deals in rights

relating to real property rather than the
land and the buildings themselves.

Efficiency

of the real property market

dependent on the technical characteristics
and the economic characteristics

Technical Characteristics
Geography

location

Information

difficult to obtain quickly

There

are differences in construction, site

age special characteristics

Real

estate market separate markets

Economic characteristics
Geographic

divisions imperfect
competition between local markets

Imperfection
Spatial

fixity

of capital markets

Definition of Property Rights

Social

conventions backed by the

enforcement power of the state (at various
levels) or the community, allowing
individuals or groups to lay a claim to a
benefit or income stream that the state
will agree to protect through the
assignment of duty to others who may
covert, or somehow interfere with the
benefit stream.

Types of property rights

Freehold
Leasehold
Sublease
Assignment
Easiment
Wayleaves
Servitudes

Types of property rights

Sectional

title

Block

Share ownership

Joint

Ownership