What determines the value of a property?

Many people wonder why one plot will command a higher price than the other or why one apartment will be sold at a higher price than the other in the same vicinity or even the same compound. In order to appreciate why these differences arise, it is important to understand the concept of value.

Value is a measure of the benefits provided by a good or service to anyone using them and is expressed in monetary terms in order to facilitate exchange goods or services. Market value is defined as the estimated amount for which a property exchanges on the date of valuation between a willing buyer and a willing seller where the parties have perfect knowledge about the market and act prudently without any compulsion. Consequently, the value of any property should be objective, though in all cases it is influenced by four key factors.

Demand

This is the desire and ability to pay so as to acquire a given property. Generally speaking, good things, including landed properties, attract higher demand since many people want to own them. According to the economics principle of demand and supply, when demand increases and the supply is constant, the price of the commodity automatically increases. Since the supply of land cannot be changed, increase in demand pushes the values of the properties up.

Though it appears that the value of a property may lie in the eye of the beholder, value can only be assessed by trained, certified and registered property valuers.

Visualise the many families that visit new residential projects during weekends. This cursory interest is a desire to own but it does not necessarily represent demand for the property because many of these families may not be ready to make a purchase.

Utility

This is the ability of a commodity to provide expected benefits. It is a measure of the usefulness that a consumer derives from any good. In real estate, it can be described as the benefits that a proprietor obtains from using his property. In case of rental houses, it is ability of the units to bring in considerable rent. In case of hotels, it is the ability to offer the serenity and comfort that guests are looking for.

Consider this scenario: two families buy two separate upmarket apartments in a development roughly on the same floor. Mr. & Mrs. S decide to make allowable alterations to their unit by closing off the open-plan kitchen and by adding a Jacuzzi bath and a mini walk-in dresser in the master ensuite. On the other hand, Mr. & Mrs. B decide to keep their apartment exactly as it is. Holding all other factors constant, the added utilities in the first apartment can be marketed as unique differentiators thus leading to higher demand and higher rental income.

Scarcity

Scarcity has to do with how rare a product is. If the said property is in short supply, demand will be high since it elicits desire in many people to acquire. Why? This is because anything that can be easily obtained is never considered of high value. This then means that the few prime properties command higher prices since they are limited.

A good example is the proliferation of apartments in Kilimani, an area of the city which has hitherto commanded high apartment prices. In the recent past, foreign investors – especially the Chinese, have constructed several apartment blocks at a lower cost thereby reducing their prices and overall values of existing units. The same has been seen in the office space market segment whereby several office blocks have been put up in Upper Hill and Westlands and thereby increasing the stock of office space. This in turn depresses values.

Transferability

This is the ease of transferring property from one person to the other. Properties that can be easily transferred are preferred since people can sell within a short time and move on. Transferability is dependent legal requirements, type of lease, existing regional moratoria and type of land. For instance, properties requiring Land Boards approval or family approval take longer and hence may not be desired by an investor looking to flip or turnover the property for capital gains within a relatively short period.

Transferability is arguably the most important indicator of value in real estate. We all probably know a family living in shanties built on their own family land of tens even hundreds of acres. Until these families can sort out issues hindering transfer of such property – no matter how prime, no sale can proceed.

Valuation in Kenya

While it appears that the value of a property may lie in the eye of the beholder, it is important for investors to be guided by facts and not by impulses because real estate investments can be high risk. Any property that is located in an area with high demand, provides the intended utility and is easily transferable is bound to command higher value. It should also be noted that value is not the same as the cost or the price paid for a good or service. Value is inherent, and can be better seen as the benefits to be accrued from a property in the future.

In Kenya, property value can only be assessed by trained, certified and registered property valuers using any one of the many valuation approaches to meet the specific need. Valuations can be procured for: sale, insurance, liquidation, investments, inheritance, mortgage etc. Feel free to reach out to the Citiscape Valuation Department for all your valuation needs.

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