property represents a considerable portion of the world’s wealth,
and its valuation is fundamental to the viability of global property
and financial markets. Real property has to be distinguished from
other categories of property, namely personal property, businesses,
interests. Without further qualification or identification, the word
property may refer to all or any of these categories. Because
Valuers often encounter assignments involving property types other
than real property or properties whose value includes several
categories, an understanding of each property type and its
distinguishing characteristics is essential.
the customary division of property into four discrete categories has
long been recognised, new entities and instruments have proliferated
over recent decades.
accepted frame of reference has readily accommodated these new
classes of property and familiarity with specialised property types
and interests is becoming ever more integral to valuation practice.
The International Valuation Standards Committee recognises the
following four property types: real property, personal property,
businesses and financial interests.
Real property is an interest in real estate. This interest is
normally recorded in a formal document, such as a title deed or
lease. Therefore, property is a legal concept distinct from real
estate, which represents a physical asset. Real property encompasses
all the rights, interests, and benefits related to the ownership of
real estate. In contrast, real estate encompasses the land itself,
all things naturally occurring on the land, and all things attached
to the land, such as buildings and site
The term realty is sometimes used to distinguish either
real property or real estate from items of personal property, which
in certain States are legally referred to as personalty.
The combination of all the rights associated with the ownership of
real property is sometimes referred to as the bundle of rights.
These can include the right to use, to occupy, to enter, to sell,
to lease, to bequeath, to give away, or to choose to exercise any or
none of the above-mentioned. In many situations, specific rights may
be separated from the bundle and transferred, leased, or alienated by
Rights or interests in real property derive from legal
estates. Legal estates are defined by the laws of the State in
which they exist. Legal estates are usually subject to outside
limitations imposed by the State, such as taxation
(assessments/ratings), compulsory acquisition (eminent
domain/compulsory purchase/condemnation), regulation (police
power/planning/zoning), or appropriation by government in
of intestacy (escheat/ bona vacantia).
Absolute ownership subject only to limitations imposed by the
State is known as a fee simple estate, or freehold.
Leases are contractual arrangements, which create other estates
in real property. Under a lease, the landlord, or lessor, maintains
the ownership interest, known in some States as the leased fee
right of use and occupancy being conveyed or granted to a tenant. The
interest which the tenant, or lessee, acquires under the lease, known
in some States as the leasehold estate, is the right of use
for a stated term under certain conditions.
Subleaseholds are created when the tenant or lessee in a prior
lease conveys to a third party, a sublessee, the interest that the
tenant, or lessee, enjoys, i.e., the right to use and occupy the
A Valuer analyses whether any terms or conditions in a lease may
affect property value.
Besides restrictions by the State, other lawful limitations may
be imposed upon the rights inherent in the ownership of real
Deed restrictions and restrictive covenants, which run
with the land, may affect the use, development, and conveyance of
Easements are nonpossessory (incorporeal) interests in landed
property conveying use, but not ownership, of a portion of that
property. Rights-of-way are rights or privileges, acquired through
use or contract, to pass over a portion or strip of landed property
owned by another.
Other important ownership and financial interests may be
associated with real property.
Partial or fractional interests in real property rights are
created by legal divisions of the ownership interest. For example,
is not only owned in sole proprietorships. It may also be held by
corporations (shareholders), partnerships, joint tenancies, and
tenancies in common.
Trusts create another type of interest in real property rights.
The interest of a beneficiary under a trust is known as the equitable
or equity interest as opposed to the legal interest of the
trustee(s). (A beneficiary is said to hold equitable title while
legal title is held by
Real property, in the terminology of accounting, usually falls into
the category of fixed, or longterm, assets. Sometimes, real property
or financial interests are created by mortgage pledges where
the property is used as collateral to secure finance or a charge is
taken over the property. An owners’ equity position in the property is
considered a separate financial interest.
a current asset, e.g., where land or improved real estate is held in
inventory for sale.
The asset is the interest held in the real estate, i.e., the
asset is the real property.
It is the ownership of the asset that is valued rather than the
real estate as a physical entity.
Where the ownership of an asset is purchased and sold in a
marketplace, market participants ascribe specific values to ownership
of particular interests in real estate. These values ascribed by
market participants form the objective basis for estimating the
Market Value of real property.
Valuation of real property is undertaken for a variety of reasons,
which include the following categories: financial reporting,
transactions involving transfers of ownership, loans and mortgages to
be secured by property, litigation, tax matters, and counseling or
investment decision making. With the exception of the last category,
Market Value is the value basis in all the following
Valuations of fixed assets prepared for financial statements and
related accounts to reflect the effect of changing prices or current
Valuations to assist a prospective buyer in setting an offering,
to assist a prospective seller in establishing an acceptable asking
price, or to help both parties in determining the sale price for a
proposed transaction; valuations to establish the basis for
reorganising or merging the ownership of multiple properties;
Valuations required to estimate the value of collateral property
offered for a proposed mortgage loan or to establish a basis for
or underwriting a loan on the property;
Valuations performed in compulsory acquisition (eminent domain/
condemnation proceedings), in litigation or arbitration involving
disputes over contracts and partial interests, and settlements of
damages caused by environmental accidents or violations;
Valuations required to estimate assessed value/rating; to
separate assets into depreciable and non-depreciable items and,
thereby estimate applicable depreciation; or to determine gift or
Valuations and ancillary assignments performed for a broad
spectrum of clients, e.g., investors, insurers, claims adjusters,
auctioneers or liquidators, and zoning boards (on the probable
effects of planning proposals) as well as for a diversity of
purposes, e.g., market or feasibility analyses, cost/benefit
analyses, determination of book value for new stock issues (or
revisions thereof), and the setting
prospective rent schedules and lease provisions.
In any valuation of real property, the relevant characteristics of
the property must be identified.
the location, the physical and legal description, and the
economic or income-producing attributes;
the real property interest (fee simple/freehold, leased fee,
leasehold, subleasehold) to be valued;
any personal property, trade fixtures, or intangible items that
are not real property but that are included in the valuation (see
para. 3.2 below);
any known easements, restrictions, encumbrances, leases,
covenants, or special assessments/ratings on the property or other
items of similar nature; and
- whether the
subject property is a partial or fractional interest or a physical
segment of a larger land parcel.
ANZVGN 7,The Valuation of Partial Interests in Property Held Within
The valuation of real property may be influenced by special
considerations, such as:
A requirement to analyse the merger of estates (Marriage, or
Assemblage Value) or the separation of property interests (Component
The effects of likely zoning changes and infrastructure
development, e.g., the extension of public utility systems or access
The sales comparison, income capitalisation, and cost approaches and
the methods associated with these approaches are generally applied to
the valuation of real property. A Valuer will commonly
markets characterized by weak demand, oversupply, and few sale
transactions, where estimates of Market Value may be difficult
to support on the basis of current or historical evidence. In such
circumstances, the focus of market participants may shift to other
indicators of property value or performance.
the indications derived from two or more of these approaches and
associated methods. All three approaches are based on the principle
of substitution, which holds that when several similar
commensurate commodities, goods, or services are available, the one
with the lowest price attracts the greatest demand and widest
The sales comparison approach establishes limits on the
Market Value for real property by examining the prices
commonly paid for properties that compete with the subject property
are investigated to ensure that the parties to the transaction were
typically motivated. Sale prices reflecting motivation other than
that of a
market participant, i.e., transactions of special purchasers who are
willing to pay a premium for a particular property, should be
The subject property (property being valued) is compared with the
sale prices (and listings and offerings) of similar properties that
have recently been transacted in the market. Sale prices are analysed
by applying appropriate units of comparison and are adjusted for
differences with the subject on the basis of elements of comparison
(see the Guidance Note on Real Property Valuation, GN 1, para. 5.11.4
In applying the sales comparison approach, a Valuer must
consider the property rights to be valued to ensure that the property
rights in the subject property are the same as those associated with
comparable properties. If this is not the case, (an) appropriate
adjustment(s) to the comparable sales is necessary.
The sales comparison approach has especially broad
applicability and is persuasive whenever sufficient market
are available. Data obtained by application of this approach may be
in the income capitalisation and cost approaches. The reliability of
sales comparison may be limited, however, when market conditions are
marked by rapid change or volatility, or in valuations of
specialised, or special purpose, properties that are rarely sold.
In the income capitalisation approach, the Market
for the real property is established by the income-producing
capacity of the real property.
income capitalisation approach also relies on the principle of
anticipation, which perceives value as created by the expectation of
future benefits (income streams).
Income capitalisation considers comparative income and expense
data to establish the net (operating) income for the subject
property. Capitalisation is performed either by application of a
single rate (overall capitalisation rate, or all risks yield) to a
single year’s income or by application of a yield or discount rate
(reflecting measures of return on investment) to a series of incomes
over a projected period (see the Guidance Note on Real Property
Valuation, GN 1, Para. 5.12 to 5.12.5).
Because investors generally focus on the rate of return, the
assumptions or inputs underlying value estimates obtained by income
capitalisation may be compared with the performance of alternative
and financial investments.
Income capitalisation is most often applied to 100% ownerships
(inclusive of all shareholders or partners) of equity interests in a
The cost approach establishes the value of the real
property by estimating the cost of acquiring land and building a new
property with equal utility or adapting an old property to the same
use with no undue cost due to delay. An estimate of entrepreneurial
incentive or developer’s profit/loss is commonly added to land and
older properties, the cost approach develops an estimate of
depreciation including items of physical deterioration and functional
An estimate derived from the cost approach represents the value
of the fee simple, or freehold, interest in the property. If the
property is leased/held in leased fee, or is subject to other partial
interests, the Valuer must make an adjustment to reflect the specific
real property rights being valued.
Cost and Market Value are most closely related when
properties are new. The cost approach is often applied in valuations
of new or recent construction, and proposed construction, additions,
Cost estimates, however, tend to establish the upper limit of what
market purchasers would pay for such properties.
cost approach is also useful in the valuation of specialised
or special purpose properties, which are rarely sold (see GN 8,The
Cost Approach for Financial Reporting-(DRC)).
Personal property refers to ownership of an interest in items
other than real estate. These items can be tangible, such as a
chattel, or intangible, such as a debt or patent. Tangible personal
property represents interests in items that are not permanently
affixed to real estate and are generally characterized by their
moveability. In some States, items of personal property are legally
recognised as personalty in distinction to realty (see
Property Types, para. 2.1.1).
Examples of personal property includes interests in:
Identifiable, portable, and tangible objects considered by the
general public to be personal, e.g., furnishings, collectibles, and
appliances. Ownership of the current assets of a business, trade
inventories, and supplies is considered to be personal property.
In some States, the above are referred to as goods and
Non-realty fixtures, also called trade fixtures or
tenant’s fixtures (fixtures and fittings), are
attached to the property by the tenant and used in conducting the
trade or business. Leasehold improvements, or
improvements, are fixed improvements or additions to the land or
buildings, installed and paid for by the tenant to meet the tenant’s
or tenant’s fixtures are removable by the tenant upon expiration of
the lease. Their removal causes no serious damage to the real estate.
or tenant’s improvements are finishings or fittings, such as
partitions and outlets constructed on site. The useful life of
tenant’s improvements may be shorter or longer than the term of the
longer than the lease term, the tenant may be entitled to
compensation reflecting the extent to which the leasehold
improvements have increased the value of the rented premises.
By extension, the above category may include specialised,
non-permanent buildings, machinery and equipment, which in some
States is called Plant and Machinery.
In other States, the term Furniture, Fixtures,and Equipment
(FF&Es) comprises both of the categories described in para.
Net working capital and securities, or net current assets, are
the sum of liquid assets less short-term liabilities. Net working
capital may include cash, marketable securities, and liquid supplies
less current liabilities such as accounts payable and short-term
Intangible assets are interests held in intangible entities.
Examples of intangible property interests include the right to
recover a debt and the right to profit from an idea. It is the right,
i.e., to recover or to profit, as distinct from the intangible entity
itself, i.e., the debt or the idea, which is the property and to
which value is ascribed.
A valuation that includes both personal property and real property
must identify the personal property and consider its effects on the
value estimate given.
Valuations of personal property may be an element of a larger
assignment. The definition of value by which the personal property is
valued must be consistent with the purpose of the property valuation,
whether that purpose is to sell, to renovate, or to demolish the
property. Personal property may be valued according to its Market
Value, Salvage Value, or Liquidation Value, e.g., the
value of personal property in a hotel that was sold as a trading
entity versus the value of personal
in a hotel that was sold after the hotel went out of business. (See
IVS 2, para. 3.6 and 3.7.)
A Valuer must be able to distinguish personal property from real
property and on occasion may be required to exclude it, e.g., in
assignments undertaken for government-related functions such as
taxation or compulsory acquisition.
In a valuation of business assets, the Valuer must consider
whether such assets are to be valued as part of a going concern or as
A Valuer should be familiar with local custom regarding whether an
item is considered personal property or real property. In certain
circumstances, a securely affixed item, nominally treated as personal
may revert to real property upon termination of occupancy, especially
if its removal and relocation would result in costly damage to the
item itself or the building in which it is located.
The techniques used in the three valuation approaches may be applied
to the valuation of personal property. (see GN 5,Valuation of
If a Valuer finds that personal property included in the property
subject to valuation is either superior or inferior to that typically
found in comparable properties, the Valuer should make allowance for
the differing contributory value of the personal property.
In certain assignments, a Valuer may have to determine the degree
of physical deterioration, functional obsolescence, and economic
obsolescence afflicting items of personal property. Such a
determination will also consider the remaining economic life of
building(s) with which the related personal property is associated.
A business is any commercial, industrial, service or
investment entity pursuing an economic activity.
are generally profit-making entities operating to provide consumers
with products or services. Closely related to the concept of
entity are the terms operating company, which is a business
that performs an economic activity by making, selling, or trading a
product or service, and going concern, which is an entity
normally viewed as continuing in operation in the foreseeable future
with neither the intention nor necessity of liquidation or of
scale of its operations.
Business entities are constituted as legal entities. A business may
be unincorporated or incorporated.
Examples of unincorporated entities include sole proprietorships,
joint ventures, and general and limited partnerships.
Examples of incorporated entities include closely-held
corporations, or close companies, and publicly-held corporations, or
public companies whose stock is available to and held by the public.
Business entities cut across an extremely broad range of economic
activities, encompassing both private and public sectors. Business
activities include manufacturing, wholesaling, retailing, lodging,
health care, and financial, legal, educational and social
services, among others. Business entities established to provide
infrastructure services to the public, i.e., public utilities, are in
many States set up as corporations controlled but not owned by the
- Other legal
forms of business entities include trust arrangements whereby
control is vested in either individual trustees or corporate trustees,
and multiple entities combining parent and associate or
subsidiary corporations, partnership interests, and trusteeships.
Investment businesses or holding companies, which
the controlling interest in subsidiary companies by virtue of
ownership of stock in those companies, include property and
Properties such as hotels; fuel stations; restaurants; and movie
theatres, or cinemas, variously called properties associated with
a business entity, properties with trading potential, specialised
trading properties or operational entities, are valued at
Market Value, but their Market Value includes value
components constituting land, buildings, personal property,
intangible assets, and the business itself. Because
properties are commonly sold in the market as an operating package,
separate identification of land, building, and other values may be
difficult, so additional care should be taken to identify the
property components included in the valuation. (see GN 12,Valuation
of Specialised Trading Property).
Under the terminology of accounting, both tangible and intangible
assets are included among the assets of a business entity:
Tangible assets include current assets, and longterm assets such
as realty, fixtures, equipment, and tangible personal property.
Intangible assets, which are considered intangible personal
property, include management skill, marketing know-how, credit
rating, an assembled work force, an operational plant, goodwill, and
ownership of various legal rights and instruments (e.g., patents,
copyrights, franchises, and contracts).
may include two distinct components: goodwill that is propertyspecific,
or inherent within the property and transferable to a new owner on sale
of the property, and personal goodwill that is associated with the
proprietor or manager.
- The valuation
of businesses is undertaken for a variety of purposes including: (See
the Guidance Note on Business Valuation, GN 6, Para. 5.0)
acquisition and disposition of an individual business, a business
merger, or the estimation of the value of the capital stock owned by
the shareholders in the business.
Business valuations may be based on the Market Value of the
business entity.The Market Value of a business is not
necessarily equivalent to the Value in Use of the
business.Valuations done for financial reporting are generally
required to report Fair Value, which may or may not be
equivalent to Market Value. In such situations, a Valuer
should indicate whether the value satisfies or does not
valuations are often used as a basis for allocating and reflecting the Value
in Use (see International Valuation Standard 2, para. 3.1) of the
various assets of a business. Business valuations may also provide the
basis for estimating the extent of obsolescence of specified fixed
assets of a business.
both Market Value and Fair Value definitions (see
General Valuation Concepts and Principles, para. 8.1).Valuations of
going concerns (defined in Property Types, para. 4.1) are generally
in Use. For financial reporting purposes, Value in Use has
a specific meaning under International Accounting Standard 36,
Impairment of Assets, which distinguishes the term from its common
in valuation practice.
A Valuer must clearly define the business (e.g.,operating company,
holding company, specialised trading company), business ownership
interest, or security (e.g., closely held or publicly held company
stock, and investment trust shares) being valued.
ownership interest may be undivided, divided among shareholders, and/or
involve a majority interest and minority interest.
Business valuations employ three approaches to value.Valuers commonly
reconcile the indications derived from two or more of these
approaches and associated methods. (see the Guidance Note on Business
Valuation, GN 6, Para. 5.14).
- A Valuer
must consider the rights, privileges and conditions that attach to the
ownership interest, whether held in corporate form, partnership form,
or as a proprietorship.
An asset-based approach to value examines a balance sheet
for the business that reports all assets, tangible and intangible,
and all liabilities at Market Value, or an appropriate
carrying amount. When
asset-based approach is used in assignments involving operating
businesses valued as going concerns, the value estimate obtained
should be considered together with the value estimate(s) from
An income capitalisation approach to value calculates the
present value of anticipated income or benefits in view of their
expected growth and timing, the associated risk, and the time value
of money. Income is converted into an indication of value either by
means of direct capitalisation of a representative income level, or a
analysis, or dividend method, in which cash receipts estimated for a
sequence of future periods are converted to present value by
pplication of a discount rate.
A sales comparison approach to value compares the subject
business to similar businesses, business ownership interests, or
securities that have been sold in the open market. The comparable
businesses should be in the same industry as the subject and
responsive to the same economic variables.
sources of data include the acquisition market in which entire
businesses are bought and sold, prior transactions in the ownership
of the subject business, and public stock markets in which ownership
interests of similar businesses are traded.
Financial interests in property result from the legal division of
ownership interests in businesses and real property (e.g.,
partnerships, syndications, corporations, co-tenancies, joint
ventures), from the
grant of an optional right to buy or sell property (e.g., realty,
stocks, or other financial instruments) at a stated price within a
specified period, or from the creation of investment instruments
secured by pooled real estate assets.
Ownership interests may be legally divided to create
partnerships, in which two or more persons jointly own a business or
in its profits and losses.
A general partnership is an ownership arrangement in which
all partners share in investment gains and losses and each is fully
responsible for all liabilities.
A limited partnership is an ownership arrangement
consisting of general and limited partners; the general partners
manage the business and assume full liability for partnership debt
while the limited partners are passive and liable only to the extent
of their own capital contributions.
Other legal entities related to partnerships are syndications and
A syndication is often organised by a general partner.
Investors in the syndication become limited partners. A syndication
pools funds for the acquisition and development of real estate
projects or other business ventures.
A joint venture is a combination of two or more entities
that join to undertake a specific project. A joint venture differs
from a partnership in that it is limited in duration and
An option is an agreement to keep open an offer to buy,
sell, or lease real property for a specified period and at a stated
price. An option creates a contractual right, the exercise of which
is generally contingent upon the fulfillment of specified conditions.
holder may or may not ultimately choose to exercise the option. In
this respect, an option differs from a contract to buy or sell a
property. Purchase options may also be written into leases.
Purchase options often contain the provision that certain parts of
all rents paid may be applied to the purchase price.
Real estate investment through the ownership of securities,
or instruments securing both debt and equity positions, represents an
alternative to the direct ownership of property. Investors are able
and trade shares of an interest in a property or pool of properties
in the same way they would buy and sell shares of corporate stock.
The market for such securities includes both a private, or
institutional, sector (partnerships, corporations,
pension/superannuation funds, and insurance companies) and a public
sector (individual investors who trade in a securities market).
Financial interests are intangible assets and can include:
investment instruments include real estate investment trusts (REITs)
(property investment or unit trusts), collateralised mortgage
obligations (CMOs), commercial mortgage-backed securities (CMBSs), real
estate operating companies (REOCs), and separate and commingled
- the rights
inherent in the ownership of a business or property, i.e., to use, to
occupy, to sell, to lease, or to manage;
Financial interests require valuation for a wide
- the rights
inherent within a contract granting an option to buy, or a lease
containing a purchase option, i.e., to exercise or not to exercise; or
rights inherent in ownership of a security issue (i.e., to hold or to
A financial interest may be included among the assets of a
partner. To establish the total value of assets owned by the partner,
the value of the financial interest must be determined. Or a partner
may wish to sell his or her interest, or the interest may have passed
into an estate subject to inheritance taxes and probate proceedings.
may also purchase interests for the purpose of transferring them to a
- Options to
buy, which are often obtainable for a small amount of money, create
considerable leverage, or gearing, the impact of which must be
considered in the final transaction price. Lease purchase options
restrict the marketability of the leased property, and may limit the Market
Value of the leased property and/or leasehold interest.
International Accounting Standard, IAS 32, Financial Instruments:
Disclosures and Presentation, para. 11, defines financial asset,
financial liability, financial instrument, and equity
instrument; IAS 32, para. 28,
of securitised investment instruments are done for purposes of
underwriting and rating the securities prior to initial public
compound (financial) instrument. Under IAS 32, para. 86, an
entity shall disclose information about Fair Value for each
class of financial assets and financial liabilities, in a way that
permits comparison with the corresponding carrying amount in the
balance sheet. IAS 32, para. 92, summarises the items an entity is
required to disclose.
A financial asset is any asset that is a) cash;b) an
equity instrument of another entity; c) a contractual right: (i) to
receive cash or another financial asset from another entity; or (ii)
to exchange financial instruments with another entity under
conditions that are potentially favorable; or
a contract that will or may be settled in the entity’s own equity
instruments and is: (i) a nonderivative for which the entity is or
may be obliged to receive a variable number of the entity’s own
equity instruments; or (ii) a derivative that will or may be settled
other than by the exchange of a fixed amount of cash or another
financial asset for
fixed number of the entity’s own equity instruments.
Common examples of financial assets representing a contractual
right to receive cash in the future are a) trade accounts receivable
and payable; b) notes receivable and payable; c) loans receivable and
payable; and d) bonds receivable and payable.
A financial liability is any liability that is: (a) a
contractual obligation (i) to deliver cash or another financial asset
to another entity; or (ii) to exchange financial assets or financial
liabilities with another entity under conditions that are potentially
unfavourable to the entity; or (b) a contract that will or may be
settled in the entity’s own equity instruments and is:
a non-derivative for which the entity is or may be obliged to deliver
a variable number of the entity’s own equity instruments; or (ii) a
derivative that will or may be settled other than by the exchange of
a fixed amount of cash or another financial asset for a fixed number
of the entity’s own equity instruments. For this purpose the
entity’s own equity
do not include instruments that are themselves contracts for the
future receipt or delivery of the entity’s own equity instruments.
entity may have a contractual obligation that it can settle by
delivery of cash or another financial asset, exchange of financial
assets and liabilities, or by payment in the form of its own equity
instruments, either non-derivative or derivative.)
Common examples of financial liabilities representing a
contractual obligation to deliver cash in the future are a) trade
receivable and payable; b) notes receivable and payable; c) loans
receivable and payable; and d) bonds
A financial instrument is any contract that gives rise to
both a financial asset of one entity and a financial liability or
equity instrument of another entity. Financial instruments range from
traditional primary instruments such as bonds to various forms of
derivative financial instruments:
Derivative financial instruments give one party a contractual
right to exchange financial assets with another party under
conditions that are potentially favorable, or a contractual
obligation to exchange
assets with another party under conditions that are potentially
they generally do not result in a transfer of the underlying primary
financial instrument on inception of the contract, nor does such a
transfer necessarily take place on maturity of the contract (IAS
Derivative financial instruments create rights and obligations,
effectively transferring between the parties to the instrument one or
more of the financial risks inherent in an underlying financial
(IAS 32,AG 16).
Many types of derivative financial instruments embody a right or
obligation to make a future exchange, including interest rate and
currency swaps, interest rate caps, collars and floors, loan
note issuance facilities, and letters of credit (IAS 32,AG 19).
A finance lease is regarded as a financial instrument but
an operating lease is not regarded as a financial instrument (IAS
An equity instrument is any contract that evidences a
residual interest in the assets of an entity after deducting all its
Examples of equity instruments include non-puttable ordinary
shares, some types of preference shares, and warrants or written call
options that allow the holder to subscribe for or purchase a fixed
number of non-puttable ordinary shares in the issuing entity in
exchange for a fixed amount of cash or another financial asset (IAS
A purchased call option or other similar contract acquired by an
entity that gives it the right to reacquire a fixed number of its own
equity instruments in exchange for delivering a fixed amount of cash
financial asset is not a financial asset of the entity (IAS 32,AG
The value of the assemblage of all the various financial interests in
a property may be larger or smaller than simply the sum of the
- A compound
(financial) instrument is a financial instrument that, from the
issuer’s perspective, contains both a liability and an equity element.
in that property.
The value of the 100% ownership interest (inclusive of all
shareholders or partners) in income-generating properties held by
partnerships or syndications will likely exceed the aggregate value
of minority interests in the properties. Similarly, the value of a
REIT portfolio, representing an assemblage of various properties, is
likely to differ from simply the sum of the values of all the
properties that make up the portfolio, a consequence attributable to
the specific assemblage of properties in the portfolio and/or the
management of the portfolio.
A Valuer estimates the value of the entirety or whole interest in
the property before dealing with the disaggregated or fragmented
In assignments involving financial interests, a Valuer must
clearly identify the exact ownership interest being valued, whether
it be a majority or minority ownership interest in a business or
right, or a majority or minority ownership interest in securitised
real estate investment. The Valuer must examine the contractual
arrangements between parties or articles of association (articles of
incorporation or articles of partnership) to verify the percentage
share or stake that the financial interest in the property
The valuation of financial interests involves highly specialised
considerations. Therefore, a Valuer must adapt the valuation approach
or approaches to the nature of the financial interest subject to
All three approaches may be appropriate to the valuation of
property held by general partnerships.
When comparable sales are analysed in the sales comparison
approach, the Valuer determines whether non-realty items were
included in the purchase price. If non-realty items were included,
they should be identified and their effect on value considered and
In situations where a general partner has acquired interests in
partnership or syndications for sale as limited partnership
interests, the Valuer considers the effect of non-realty items on the
These items may include special financing, guarantees of occupancy or
income, and management services.
Options to buy are considered at the cost to the buyer when the
option is exercised. Thus, the cost of an option to buy that has been
exercised is to be added to the sale price of the realty. A Valuer
considers the effect of leverage, or gearing, produced by a purchase
option on the final transaction price for a property. When a purchase
in a lease is exercised and past rent payments are credited to the
purchase price, such payments are treated as installment payments.
Units or shares in securitised real estate investment are priced
in markets where such securities are traded. Valuations of real
estate assets held as part of a package of investment instruments may
be required for underwriting or rating purposes prior to an initial
public offering. In such situations, a Valuer applies those
approaches and methods consistent with the income-generating
characteristics of the real estate.