Whether valuing the Going Concern, Leasehold or Freehold (Subject to Lease) Interest of a child care centre, the overall concept is common for each valuation.
International Valuation Standards (IVS) 2007 details the definition and application of valuation approaches for property/real estate valuation reports as follows:-
Valuations of any type, whether undertaken to estimate market value or a defined non-market value, require that the Valuer apply one or more valuation approaches. The term “valuation approach” refers to generally accepted analytical methodologies that are in common use. In various States these approaches may be referred to as “valuation methods”.
Market based valuations normally employ one or more of the valuation approaches by applying the principle of substitution, using market-derived data. This principle holds that a prudent person would not pay more for a good or service than the cost of acquiring an equally satisfactory substitute good or service, in the absence of the complicating factors of time, greater risk, or inconvenience. The lowest cost of the best alternative, whether a substitute or the original, tends to establish Market Value.
Whether valuing a Going Concern or Leasehold Interest, the primary method of valuation is the Income Capitalisation Approach. The Income Capitalisation Approach involves the capitalisation of the Net Operating Profit (NOP). The NOP is derived by deducting the business operating expenses from the business revenue. Once the NOP is established, a suitable initial yield is applied, as derived from comparable sales evidence.
In the case of valuing a Leasehold Interest, the market rent must also be deducted as a business expense. With respect to Leasehold Interests, the market also refers to a ‘business multiple’, which is actually the Years Purchase or Income Capitalisation Approach in reverse.
A secondary valuation method for each interest is by Direct Comparison, in this instance, on a rate per place basis. Careful consideration must be given when comparing the sales evidence including inter alia, building age and condition, the number of licensed places, the composition of places, land size/surplus land, land zoning, location/position, competition, day rates and demographics. In the case of Leasehold Interests, the lease term/conditions and rental level is critical.
The primary method of valuation for a Freehold (Subject to Lease) Interest is the Income Capitalisation Approach. The most important factor in this approach is determining whether the current rent or the estimated rent is to market. The market rent is a function of business revenue, which, in a child care centre, is dependent upon various factors including exposure, access, building condition/layout, on-site parking, day rates, demographics, number of licensed places and competition.
The second most important factor to determine in this method is the capitalisation rate, which must be obtained from comparable sales evidence. In addition to the above factors, the lease term and conditions are a significant consideration in the selection of an appropriate capitalisation rate.
Whilst there is a steady volume of sales in the market at any one time, and there are specialist selling agents, it can be difficult to obtain critical trading information. It can therefore prove invaluable to employ a specialist valuer to ensure pricing of the asset is to market.
Michael Bryer
Robertson & Robertson has 38 years experience in providing specialised valuation advice. If you are a business owner looking to sell or purchase and are in need of a child care valuation report or are seeking valuation advice for mortgage, taxation or legal purposes, our specialist valuers can assist you.
To enquire about obtaining a child care valuation report or for valuation advice in general, please CONTACT US.