Compare and contrast the alternative forms of appraisal techniques commonly used in the context of commercial developments

Introduction:

Appraisal in the context of Commercial developments is bringing on the opinion of the market valuation of the property / real commercial development. It is usually called as Market Value of the Property and is considered to be very vital in terms that it brings along the true value of the development (Isaac, 2002). The true need of it is only brought about by the demand of the class of investors and their huge infrastructure built up on the humongous commercial developments. The reason being that the two real estates are never the same and they differ with regards to the location, the identity, the investment etc. which are the most important and detrimental factors of the property. (Brown, 1999)
And, above all when there is no system in the market for the pricing mechanism, there appears a valuation procedure that determines the value of the commercial development. (Isaac, 2002)

Kinds of Value:

A few types of value determined by an appraisal of commercial development projects in real estate are as follows:

1. Market Value
2. Value in Use
3. Investment Value
4. Insurable Value
5. Liquidation Value

In this context, the market value is considered to be the most valuable in the sense that the other ones are only related directly to the specified valuation technique related to the commercial development. However; the market value is one technique that it covers all the above mentioned in the point system. (Mackmin & Baum, 1995)
Techniques used in Valuation:
The three main approaches to Value are as follows:

• The sales comparison approach
• The cost approach &
• The income approach

These three approaches are particularly meant for the valuation done in the UK, however, since these approaches are not directly linked with the valuation procedure, therefore, a few others will be discussed later which are directly used in the valuation procedure in the UK.
Apart from the other Valuation techniques used specifically in the UK, there are two approaches that are used for commercial properties.

Income / Investment approach:

This approach is commonly implied in the method of letting the commercial development and producing the future cash flows in the market on permanent basis. This is a secured and a better way to determine the property value as it deals in income of the individual / organisation. (Isaac, 2002)
If the income of the estimated commercial development is known and also the rental value has been identified; then the value of the commercial property can be determined pretty easily by means of a simple model. For example, the rental value of the commercial development is a few hundred thousands of sterling and the income is above that price to be estimated as a completely equally valued property as opposed to the one in which the income is above the mark of the property price. (Brown, 1999)
This approach is a comparison approach as the main variables are known in the market.

Profits / Accounts approach:

This approach is specifically used in the UK for the commercial developments like Hotels, old-age homes, restaurants etc., An average of a three year income yield is determined in this method. This method is commonly used for the trading developments and is not market driven in any case Scenario where the resulting value of the commercial development will be called as market value. (Brown, 1999)

Contrast & Comparison:

In the UK the need for appraisal for the commercial developments have always been felt which is why the appraisal has been very necessary over there however, it has become very obvious in the past few years that the understanding of the appraisal was not done by the appraisers and they could not develop the system accordingly. The concept of complete versus limited has caused an immense amount of confusion in the heads of the clients as a part of formulating a proper system in the UK appraisal procedures. If we compare the approaches of the valuation techniques, we would find out that there is merely a contrast available in the investment and income approach with the other one, however, side by side valuation is necessary for the property to be evaluated accordingly and properly.
In the context of the above there were a few factors that were formulated to identify the scope of the commercial work that was required:

• Appraisal’s and the appraisal report’s intended usage
• Value definition
• Assumptions or hypothetical proofs
• Analysis of an appraisal system
• The intended users and the consumers (Mackmin & Baum, 1995)

This actually minimised the scope of the users and then identified the end user’s needs and their requirements in determining the value of the commercial development as a whole. Since the most important factor is the scope of the development’s valuation; therefore it is never to take into least of the consideration at any cost.

Advantages & Disadvantages:

There is a term of art in the key process of appraisal that is termed as Highest and the Best Use; it is basically the procedure that determines the use and the disuse of the property and valuates it in actual terms. It normally deals in the commercial properties like lands and huge residential projects. Firstly, the determination is made with regards to the uses of the project and then secondly it deals with the legally impermissibility of the projects i.e. commercial developments. The outcome of this terminology is of the best use for the commercial developments and as a result we can come to know that the development is a vacant land or else. It is also sometimes referred to as economically supported model as it outlines those processes which are financially feasible. The end result therefore is the highest and the best use of the site. (Mackmin & Baum, 1995)