establishing investment requirements

This article is concerned with the placement of capital in property for investment. The vehicle may be a sole owner, partnership, syndicate, company or institution such a superannuation fund. The investment parameters, goals and objectives will be different for each investment vehicle, and class and type of property.

The investment parameters, goals and objectives are ultimately determined by the relevant people in conjunction with the valuer. As there is a broad range of investors the relevant people can be your client, fund managers, industry and government professionals, agents and accountants.

The valuer’s normal role is to establish the investment requirements and expectations of their clients, the investors, with property investment advice sourced from market information and data. In this unit we assume that the investors have considered all alternative investment possibilities such as shares and bonds, and have decided to invest in property. The valuer’s role now is to advice them on the best investment property that suits their investment requirements.

Potential investment properties are tested for performance and viability against investment parameters. The investors are investing in investment properties that will provide capital gains and/or income during the investment period.


The investment in real estate is illiquid. That is, the investor cannot quickly sell their properties in a downturn or the investor’s time of need. Compare with investing in the share market where shares can be sold within one day or earlier.

Because of the illiquid nature of property it is more important for the investor to preplan the investment by determining investment parameters goals & objectives at the start. Property investment requirements are long term so that time is a significant factor in determining parameters, goals &outcomes. The investment property must be successful over the period of investment to enable a fair and reasonable return on the funds invested.

Factors considered by the investors include:

The valuer’s initial or front end role is to help the investor seek a suitable and profitable investment property.

Whether or not to buy the investment property and whether or not to sell the investment property depends on whether or not the property remains significant in the investor’s chosen category of business.

The investor must recognise that reasonable risks are required in investment property. However, the risk can be reduced by basing the decision on good market advice that includes expected future returns. This is largely the role of the valuer in helping the investor develop a property investment strategy. The valuer helps the investor to make careful judgments regarding the future.


There is a large range of property investment scenarios each with particular attributes that will suit the investor’s requirements. For example,

  1. SHORT TERM. For example, an existing building is bought, renovated, converted to strata units and then sold off. The period of investment would be typically, 1-3 years depending on the size and complexity of the building.

  2. MEDIUM TERM. For example, an existing building is bought, demolished and a new block of strata units is built. The period would be 1.5-4 years depending on the size and complexity of the building.

  3. LONG TERM. For example, a vacant block is bought and a new commercial building is built. This is then leased to tenants until the end of the economic life of the building. The time period of investment would be typically, 10-30 years depending on the size, complexity location of the building and external economic factors.

Investor requirements will favour one scenario over another. Short run investments are favoured by small investors who want to turn their investment capital over quickly to reduce risk and maintain liquidity. On the other hand, long run investments such as superannuation funds favour new large office blocks and shopping centres. They prefer a large low risk investment because of lower management and overhead costs/$ invested. Superannuation funds and property trusts also prefer landmark buildings for prestige and image reasons.


There are a myriad of factors involved establishing the best scenario and investment requirements. These include:

The property investor should view the investment as being dynamic. That is, important factors and decisions will be required to change over time. The valuer’s role is to integrate the investor’s need to achieve their goals for profit and growth. The valuer will assist and advise at 3 stages over the investment period:


Targets and performance measures are quantitative statements on what the investor is trying to or expecting to achieve over the investment period. Most targets and performance measures are a numerical (objective) measure bounded by time. Typically, in an investment business plan there are 4-8 measurable targets. The valuer can help measure the targets and find property that best meets those targets.

There is also a linking of targets. For example, if the target is to sell 50 strata units then the building and architect must build and design 50 units.

The target and performance must be measurable. This is a requirement for an objective measure and will allow control. For example, the investor can see whether or not the 50 units will be completed on time when about 20 have been built. If the builder appears to be running over time then the investor/supervisor can bring in extra resources or change existing resources to bring the investment in line. Such control would be difficult if not impossible without the objective measure of targets and performance.

Because property investment is dynamic, target and performance measures are not “set in stone” but should be reviewed during the life of the investment. Review dates can be decided by the valuer in conjunction with the investor. If the valuer makes an annual review of the investment including a market valuation as part of an investment report it should become apparent when some of the original factors used in the measurement of targets and performance have changed. For example, there may be uncontrollable external factors such as a change in zoning, change in market demand or taxation.

The initial stages of the investment requires a number of people such as agents, architects, builders, valuers, planners and engineers. It is desirable to have them all input into the setting the initial targets and performance measures. For example, it is no good having a target date to finish of the new building in 12 months time when the builder knows that there will be a labour and materials shortage making this target date impossible.

The actual mechanics of the investment will be in the investment plan. This is administered by the investor or development manager. The valuer therefore, is not directly concerned with individual target measures except for their role in establishment. The strengths of using target and performance measures is that the investment team is motivated, can better plan and integrate the necessary professions and trades.

When setting targets and performance measures the advising professions should set targets that are optimistic and possible, rather than safe. This may involve new, brainstorming and lateral thinking which could result in a new system or approach that gives the investor an advantage over their competitors. For example, an entirely novel or pioneer use of an old building may be seen for the first time. An example of this is the first conversion of the old woolstores at Pyrmont and Glebe into quality apartments in the 1970s.

This doesn’t mean that past investments are not important. Good investment is learning from the past and the harnessing resources and know how of the present to become effective in the future.


The finding and use of market data is one of the roles of the valuer in the property investment. Because there is a myriad of possible property investments, the sources of reliable data is extensive and of mixed quality. One of the disadvantages of investing in property is the dearth of important information. For example, an investor in shares knows everyday from the financial pages of the newspaper:

The investor in property on the other hand has no such ready knowledge. It is the valuer’s role to find the relevant data and in the interpretation of that data. The main and most important source of data are sales that have occurred in the locality and comparable to the proposed investment.


There are 3 general sources of sale and market evidence:



The valuer may be able to view the contract of sale or lease document. This is sometimes available from the owner or the law firm representing one of the parties to the transaction. However, unlike the notice of transfer and a lease attached to the certificate of title, they ares not a public domain documents. The contracts used are usually the standard form contracts prepared by the Real Estate Institute, the Law Society or a government contract. It is important that the valuer know the most important sections of the contract of sale particularly; the last schedule(s) that contain the important data for valuation purposes. Similarly the valuer should be familiar with commercial lease documents so that any non standard terms affecting market rent will be known.


The recorded sale price, legal description, title, date of contract, and the parties to the transaction can be found in NSW at the local council on the notice of transfer. This is the next most reliable source of sale information after the contract itself.


The secondary sources of sale and lease data have the disadvantage of being less reliable than the primary sources outlined above. However, they have the advantage of being more up to date and/or providing useful non legal information about the sale.


There are a number of private firms that provide sale and rental information for use by the valuer. They are usually in the form of a sales or rents schedule (summaries) grouped in local government or suburban areas. However, specific submarket breakdowns are also available.


Government departments are also a source of sale data summaries. In NSW the Valuer General has a very useful database of sale information. This is basically the same information provided to councils. Besides sale information the available data includes ownership list (a list of all properties with the same ownership),

Both private and government providers also provide useful statistics for use by the valuer. These include:

The data and information available through government and private providers (for a fee) are most useful for valuers involved with property investors.


Real estate agents particularly those concerned with commercial properties are an invaluable source of information on local sales and rentals. In a rising market the valuer will find agents an important source of up date transactions and also background information.


Interviewing the parties may be considered as primary evidence but because the information obtained is usually informal it is better classified as secondary evidence. A valuer can obtain a great deal of information by interviewing the buyer, seller, landlord and tenant the property. To obtain useful information requires a good interviewing technique.


A valuer may have a source of information through lending institutions such as a bank or building society. The institution will have the necessary sale and lease data having been provided by the applicant for a mortgage loan. This is most likely to be made available to the valuer carrying out the valuation for the institution.


Tertiary sources of information are the least reliable but can obtain a great deal of useful in firstly making the sale known and also may contain good background information of a sale, lease and general market trends.


The commercial real estate sections in newspapers and magazines often include articles or a summary of important and recent market transactions. The advertisements and asking prices of properties for sale are also important background and support data for actual sales. Particularly mention should be made of the commercial real estate section in the Financial Review.

The use of publications of the major real estate firms is covered below.


The valuer after researching sources of information as outlined above and with their own personal knowledge is in a position of determining and applying industry benchmarks to investment property. Often there is a general type of benchmark understood in the industry such as CBD commercial should achieve at least 15%pa internal rate of return. Or the initial yield or capitalization rate for CBD commercial buildings should be in the range of 5-8%pa.

The capitalization rate and the internal rate of return are the 2 most used benchmarks for investment properties. The IRR is a more universal rate and should be used whenever possible as it is applicable for all investments including shares. Therefore, it allows direct comparison with other competing investments.

The capitalization rate is a property specific rate and is the return on investment at date of purchase using the existing net face rents. Therefore, there can be great variation in the rate because of factors such as location, age of property and the expectation of rent increases or decreases in the future.

General benchmarks can be found by referring to industry research. All the major real estate firms carry out research on recent sales of commercial property and in that analysis will include expected rates of return. The use of such general rates will depend on well the sales data was analysed and how close the subject property is to an average commercial property.

Therefore, because the general benchmarks are so property and land use specific it is better for the valuer to analyse recent sales to determine their own benchmarks and be better able to adjust the benchmark f\or the subject property.

Once the valuer has determined reliable benchmarks, the general research can be used as secondary evidence.


The valuer advising on property investment is concerned with two general requirement classes:

This unit assumes that the valuer is carrying out a normal valuation role for the investor and is not involved in the day to day management of the investment. The organisational and management requirements come under the jurisdiction of the investor.


The valuation and investment advice of the valuer must accord with town planning and government controls on development and change of use. Any proposed use of the investment property must be allowable under the local town plan and general law.


The valuer cannot value an investment property as a hotel if a hotel use is illegal under the town plan and the Licensing Control Board will not grant a licence to run a hotel.

The following statutes affect the valuer in carrying out valuations and giving investment advice:


The Trade Practices Act is powerful Commonwealth legislation that covers the activities of valuers when acting as companies, incorporated businesses and individuals

The Australian Competition & Consumer Commission (ACCC) has prepared a handbook “Fair and Square” for those involved in the property industry. Industry participants must ensure they give prospective buyers the full picture, enabling them to make informed decisions when buying investment property. The Act prohibits all businesses, large or small, from engaging in misleading or deceptive conduct and anti-competitive behaviour such as price fixing, market sharing, exclusive dealing and third line forcing.

The Act has provisions covering unconscionable conduct, recognising that small businesses may be at a disadvantage when dealing with larger businesses.

The ACCC encourages the real estate industry to think of the Act as an important management tool. Compliance with the Act is good business practice and can mean increased success and profitability. Knowing their rights and obligations under the Act will help small businesses to be professional in their dealings with other businesses and avoid problems.

The following is a summary of do’s and don’ts for valuers when dealing with property investors, land lessees and occupiers of the subject property. The page numbers refer to the relevant pages in “Fair and Square”. “Fair and Square” can be downloaded from:

Don’t mislead people by:


Take care when quoting prices for your services. Always:

Don’t agree with other valuers to:

There are equivalent rules and laws under the NSW’s Fair Trading Act. This covers anybody not covered by the Trade Practices Act such as sole traders working locally only.


The main law covering business behaviour in NSW is the Fair Trading Act 1987. The act mirrors the Trade Practices Act and applies to individuals. The outline above of “Fair and Square” apply to the Fair Trading Act. For more information see the Department’s web site:


The NSW Anti-Discrimination Board and the NSW Office of Fair Trading are working with the property industry for a ‘Fair Go’ for buyers and sellers in the property market

The Anti Discrimination Act 1977 is administered by the Anti Discrimination Board (ADB). The law states that you must not discriminate against someone (treat them unfairly compared to others), or harass them, because of their:

It is also against the law to discriminate against a person because of the race, sex, pregnancy, marital status, disability, homosexuality, age or transgender of their relatives, friends or associates.

Commonwealth laws on discrimination apply to the states and territories. The Sex Discrimination Act 1984 (Cth), Racial Discrimination Act 1975 (Cth), Disability Discrimination Act 1992 (Cth) make discrimination on grounds of race, colour, national or ethnic origin, sex, marital status, pregnancy, or disability unlawful.


The Privacy Act 1988 (Cth) protects personal information kept by you on behalf of your client. There are 11 privacy principles which you should be aware of. These can be found on the web site for the Office of the Privacy Commissioner at:

This is an important statutory control as the valuer is most likely dealing with sensitive market information and proposals. If a third party finds out through you of the proposal it may jeopardise the investment plan. The investor can use you under common law and you will also be in breach of the act.


Ethics is covered in the Australian Property Institute’s Code of Ethics. This code covers all the ethical and professional requirements of a member of the institute. If the valuer is not a member of the API the Code of Ethics still lays down how a professional valuer should act.

The code is available through the API as part of Professional Practice:

See the Code of Ethics. Particularly:

2. Professional duty: “…act impartially and objectively when providing independent advice…”

4. Conflict of interest. Note that this covers both actual and potential conflicts. Your client must be made aware of any present or future conflict of interest otherwise your actions may be deemed to be a secret commission which is illegal. To be on the safe side the valuer should have acknowledgement of the conflict and agreement to continue with the valuer’s services despite the conflict in writing.

5. Confidentiality. This ethic is also covered by the Confidentiality Act covered above. Although the valuer themselves may adhere to confidentiality they should make sure there is a risk management system in place so that staff do not breach confidentiality.

The Professional Practice guide continues with Rules of Conduct which is an expansion of that covered in the Code of Ethics. Note particularly Rule 3 Client relationships which is worth quoting in full:

Rule 3: Client Relationships

3.1 Members shall not disclose to any other person or party any confidential informationprovided directly or indirectly by a client or to a client without the permission of the client except where there is a legal requirement for disclosure or the information is of public or common knowledge.

3.2 Members shall conduct themselves in a manner and demeanor which is neither detrimental to their profession nor likely to lessen the confidence of clients or the public in the Institute or the profession.

3.3 Members shall act promptly and efficiently in the servicing of the client’s instructions.

3.4 Members shall, in the case of unavoidable delay, communicate to the client the progress being made in respect of the instructions issued to the Member.

3.5 Consistent with the duty of a Member to preserve the confidentiality of a client’s affairs, a Member shall not accept a retainer to act for another person in anyaction or proceedings against, or in conflict with, the interests of the client.