Demystifying the Value Creation Concept in Real Estate

  • 1 month ago
  • 0

When the Duchess and book author – Margaret Wolfe Hungerford coined the idiom “Beauty is in the eyes of the beholder”, she broadly defined the perceptive nature of value. Unfortunately, as a real estate
practitioner I can only authoritatively apply the Duchess’ catch phrase to the concept of value creation in real estate.

From a technical perspective, a property’s value is defined as the present worth of future benefits arising from the ownership of the property. Unlike many consumer goods that are quickly consumed,
the benefits of real estate investments are generally realized over a long period of time. (Investopedia) This is hoping there is no confusion between price and value. Price is what you pay, value is what you get.
(Warren Buffett.)

According to the classical definition, price is the amount of money that is paid by the buyer to the seller in exchange for goods or services. On the other hand, perceived value validates whether that product or
service is worth the money to be paid. Value is not expressed in monetary terms alone. In fact, the definition of value to people varies extensively.

Renowned scholar – Adam Smith also provided the best example of price versus value in his paradox of value: “No one can live without water but the price is low, yet anyone is able to live without diamonds
but its price is high”. The value of water is high but it is abundant in nature so the price is low, but the value of a diamond is low but still, it is a status symbol so the price is high.

To ascertain the value of real estate, professional valuer services are required as this is a regulated specialised field. However, at a personal level, as we are all entitled to an opinion, one can always give an
opinion on the real estate in question. This ultimately gives a single property several values as each and every opinion is supported by own assumptions, perception and personal circumstances. Is there a wrong value, one may ask? By definition, valuation is fundamentally a purposive and comparative exercise in which without clarity on the requirement any number given is correct. Thus, the answer is obviously NO, as long as the assumptions made support the value, and the process followed is consistent with the prescribed methodology. Further definition of valuation is given as “the art and science of expressing an opinion in the mathematical form”. Given that it is an “art” of expressing an “opinion”, elements of subjectivity arise, but are watered down by “science” whose “mathematical form” makesit objective. From the above, why would there be any argument with a professional valuer’s work that is supported by assumptions and evidence-based research? If so, it would be a fallacy that only happens in Zimbabwe.

It is common practice to find a single building with several values ascribed to it such as fair value, market value, insurance value, investment value, etc, and each value has its own methodology to be
followed. To give meaning to this we need to clarify the role of property value. Property value is required to assess the accurate value of a property during its sale and purchase. Further, it aids in tax calculation, evaluating the return on investment, for assessing income generating potential, and loan purposes.

Considering the subjectivity of valuation, lack of regulation and accreditation of valuers puts the tax collectors, property buyers, and property sellers at risk. This is the reason why valuations can only be
done by accredited professionals. These accredited professionals are guided by International Valuation Standards in their approach and methodology as they interpret the environmental fundamentals of
every property under valuation, guided by supply and demand factors, location, neighbourhood features and facilities, size, layout, age, risk, and condition of the respective property, to mention a few. Quite a
process requiring critical scientific skills harnessed over years to master and perfect the art. In this VUCA environment, the property market has become more dynamic, and keeps changing reacting to trending circumstances. Assuch, it is necessary for valuation exercises to be carried out on a regular basis.

There is always one sacrosanct reality in value creation as no one can create value in their minds just as much as they cannot wish the value away. In fact, value is a real matter of fact. Either you have it or you
do not. By extension, respecting a professional’s work is supreme and highly rewarding.

The article was written by Mike Eric Juru the founder and Chief Executive Officer of Integrated Properties. The views expressed in this article are purely his and do not represent the organisations that are associated with him. Mike can be contacted at 0773805000 or on email

Join The Discussion

Compare listings

Open chat
We're here
Integrated Properties