Valuations for CGT: The devil is in the detail
Doing a valuation is like doing research. The valuer has to support the crucial variables in his valuation model with empirical evidence and analysis that will stand up to scrutiny, says Erwin Rode, CEO of Rode & Associates.
Referring to the impending capital gains tax (CGT); Rode says it seems that the South African Revenue Service (SARS) may allow non-valuers even owners themselves to value properties as at 1 October 2001.
However, this might turn out to be a case of penny wise, pound foolish. The important point is that the valuation, that is the motivation report, will lie in a file at SARS and must be able to stand up to a detailed and critical examination one day, maybe twenty years from now. By that time the valuer might even be dead, keeping the devil company. Hence the expression “the devil is in the detail”.
In the case of income-producing properties, the crucial variables (the detail) to motivate are the market rental and capitalization and/or discount rate used. Lesser variables that will require thorough motivation are the operating costs and the assumed long-term vacancy.
Rode has a long history of generating data for the valuation industry. Back in the 1980s Erwin Rode wanted to create an inexpensive method with which to measure property performance consistently and accurately over time. He subsequently developed some pioneering property valuation techniques, all of which are SA’firsts’, and include:
- The Rode valuation method, also known as the opportunity cash flow (OCF) method, which is now used by some of the large institutions.
- The development of regression models to estimate the capitalization rates of office and industrial properties.
- Using regression to estimate shopping centre market rentals.
- The application of multiple regression techniques to value houses in SA, and
- The quarterly surveying of capitalization rates, market rental rates and operating costs for Rode’s Report.
“Our aim was to develop an objective, scientific and computer-assisted valuation system that would produce consistent valuations over time, because its critical variables are based on impeccable sources and because the valuation does not rely on subjective forecasts,” says Erwin.
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