Brian Ronnie, Ryden's Head of Professional Services and a RICS Expert Valuer, discusses his approach to valuing complex properties and sites, such as a university campus.
One of the questions I ask APC candidates during their mock interviews is “How do you value a university, school or college?”
I am usually confronted with a blank stare and witness the onset of general panic. What I advise my students is that they should answer this with a question directed to me: What is the purpose of the valuation?
I recently had a city centre client with an educational establishment which was owned from abroad but also partly funded in the UK.
They asked me to carry out a valuation report for financial accounting purposes (i.e. for their shareholders) and also for loan security purposes for their bank. I advised that there were two separate valuations exercises that had to be carried out.
The first basis is market value. If a bank asks for the property to be valued for loan security purposes then they need to know what this asset will achieve in the market should the Borrower default. In this regard, the city centre educational establishment had to be valued on the basis of either being converted or demolished and redeveloped for an alternative use. The valuation basis was a market value carried out using the residual valuation method.
The second basis is a Depreciated Replacement Cost (DRC) method. This is used for subjects which are rarely, if ever, sold on the market. It is in effect the existing use value to the establishment and not an alternative market value, in other words, the cost for the educational establishment to buy land and develop a modern equivalent on the site, less economic and functional obsolescence. Education sector properties are often of a specialist nature arising from their construction, arrangement, size and location, or a combination of these factors.
In terms of the technicalities of carrying out a DRC valuation, at Ryden we liaise closely with our in-house building consultants to analyse recent new builds of educational facilities. From this we arrive at a build cost rate and deduct for age, condition and obsolescence factors. The value of the land will also be dependent upon the location of the subjects and the relevant planning permission/zoning that the subject has in the Local Development Plan. I have recently valued city centre assets for educational establishments where the land value is underpinned by residential values.
In summary, for loan security purposes a valuation based on market value is appropriate. For financial statements, where the property is unusual in terms of nature and design, a DRC valuation is required.
If you require property or site valuation advice contact a member of our Valuation Team.