SPECIAL FEATURE: INTERNATIONAL VALUATION DAY 2023: Asset valuation and business development in developing nations
Asset valuation and business development in developing nations
Asset valuation is the process of
determining the current market value or worth of assets such as lands, buildings,
roads, bridges, farms, stocks, bonds, shares, goodwill, intellectual property,
brands, artefacts, artworks etc. This valuation process is often necessary for
business financial reports especially in balance sheet under investments, sale,
purchase, lease or rent, insurance, commercial loans, auction, merger and
acquisition (M&A), liquidation of companies etc. Asset valuation is a tool
for measuring the economic growth and development of a nation through its real
estate products. It analyses the increment or otherwise of assets, that is, physical
value-addition by the action of man in an ecosystem.
It also tracks the effectiveness of
an individual or organisation’s strategic decision-making process and provides
the ability to track performance in terms of the estimated change in the value
of an asset or group of assets, not just in revenue. Property valuation is
affected by economic factors like foreign exchange rate, inflation, interest
rate, market stability, security and safety, level of infrastructure
development, services, aesthetics, location, depreciation, state of dilapidation
etc. Valuation exercise is both
an art and science. The art element of valuation involves various factors such
as sales forecasts, sales methods, economic outlook, capitalisation rate
determination, culture of the end-users etc.
The science element involves the valuation
data, valuation process, approaches and methodologies. Developing nations are
enclosure of spaces on the surface of the earth. They are characterised by the
physical features in them and how the spaces they cover have been organised to
improve the living standard of people. Their values depend on what the
nationals and residents of these nations can bring out from them. Valuers or
valuation practitioners have been trained in the art and science of wealth
creation in the built environment that they have become indispensable in building
life-cycle and in the society today.
The history of valuation of assets is as variegated as the word ‘assets’
itself. Economic History textbooks credited the goldsmith in England to have
started gold valuation in the 17th century. Property valuation
started as early as 18th century in England. Richard M. Hurd’s book ‘The
Principles of City Land Values’ (1903) is one of the earliest books on the
subject of real property valuation. Professor Richard T. Ely, known as the
‘Father of Land
Economics’, and others associated with the American Institute of Real Estate
Appraisers (now Appraisal Institute after its merger with Society of
Residential Appraisers in 1991) as early as 1920, argued that “market prices
and real estate value were somewhat distinct.” This means that market prices
and market values of assets are mostly not the same.
to buy certain undesirable subdivision lots (plots of land) at exorbitant
prices would in no
way be presentable as evidence of market value. (ii) Market value will be used
to designate the concept in which the thoroughly informed buyer is present and
market price will be used to designate the prices which properties actually do
bring in the real estate market.
However, the debate on the separation of price and value seems to continue
as some experts still believe the difference between price and value is the
same as the difference between half-full and half-empty! George L. Schmutz’s
book “The Appraisal Process” (1941) defined “Market Value” as “The ‘highest
price’ for which a property can actually be sold in a reasonable length of time.”
On page 11 of the book, he referenced wordings from the California (USA)
Supreme Court that also defined Market Value using the term ‘highest price.’ In
United Kingdom, it is generally believed that “market price” is distinct from
“market value”. As an asset means different things to different people, so are
the values in them. A lame will value a wheelchair more than a physically fit
man.
An asset has been found to have more than a value. A property can have face
value and latent value at the same time or capital value and rental value or
market value and forced sale value. We have such values as “aesthetic value, capital
value, depreciated value, economic value, face value, fair value, false value, forced
sale value, functional value, hidden value, intellectual value, intrinsic
value, latent value, market value, monetary value, nuisance value, open market value,
psychological value, rental value, residual value, social value, true value, warranted
value etc. This is why it is important to state the “purpose of valuation”,
“basis of valuation” and “methodology of valuation” in a “valuation report”.
Only professional valuers can accurately determine the types of values and their
worth.
Valuation of assets is directly related to business development as
businesses are established with assets and liabilities. Businesses are done with machines, men,
materials, minutes and management (assets). All these assets require regular
valuation to ascertain their worth and relevance. While businesses struggle to defray
their liabilities, they must also struggle to grow their assets with time. Change
is a constant in life. It is through periodic valuation of assets and reviews
of business processes that businesses can realise their true position and
decide whether to close shop or continue in business.
Thanks.
 |
| ESV. Olufemi Adedamola Oyedele.writes from Lagos, Nigeria |
Comments