namib I A UniVERSITY OF SCIEnCE AnD TECHnOLOGY Faculty of Natural Resources and Spatial Sciences Department of Land and Property Sciences QUALIFICATION{S): Bachelor of Property Studies Honours Diploma in Property Studies QUALIFICATION{S) CODE: 27BPRS 27DPRS COURSE NAME: COURSE CODE : EXAMS SESSION/DATE: June 2016 NQF LEVEL: 6 DURATION : 3 Hours MARKS: 100 FIRST OPPORTUNITY EXAMINATION QUESTION PAPER EXAMINER($) Mr. Amin lssa MODERATOR: Mr. S.A.K Hayford THIS QUESTION PAPER CONSISTS OF 7 PAGES (Including this front page) INSTRUCTIONS 1. Read the entire question paper before answering the Questions 2. Please write clearly and legibly! 3. The question paper contains a total of 4 questions 4. You must answer ALL QUESTIONS. 5. Make sure your Student Number is on the EXAMINATION BOOK(s) PERMISSIBLE MATERIALS 1. Use of non-programmable scientific calculator is permitted.
VAL6105 Question 1 For each of the following statements indicate whether it is 'TRUE' or 'FALSE'. Each correct answer carries 1 mark. {25) a) Verification of a sold property is necessary when using the comparative method of valuation. b) A buyer informs you that he bought the house from his brother. Your verification has confirmed that this sale is an arm's length market transaction. c) If a property having a hidden value such as oil rights is sold at a price higher than the market value of surrounding properties, then its sale price may be accepted as evidence of fair market value of nearby properties. d) A property sold at an auction to pay off unpaid debts is known as a forced sale. e) The sale price of a property that appears to be too high but has been verified to have apparent unusual conditions can be accepted as evidence of fair market value. f) The comparative method of valuation is a method used to determine the capital value of right to future value derived from ownership of a property under a given market. g) The cost approach to value involves three basic elements namely the value of the land, the current new costs for the structures and an estimated amount of depreciation. h) Reproduction cost is the amount required to construct, as of the effective appraisal date, a building with utility equivalent to the building being valued using contemporary materials, standards, design and layout. i) The reproduction cost new may be used by a valuer to value a property that was built seven {7) years ago and occupied as a private residence in Cimbebasia. j) Functional obsolescence is caused by presence of currently undesirable layout, design or other features, or absence of currently desirable features. k) Changes in land use or natural conditions may result in loss of value to the property itself and is always considered incurable. First Opportunity Examination Page 2 of7 June 2016
I) Two years ago, office space was rented for N$155/sq.m. per month in the Windhoek city centre. The rent has changed over these two years. This type of rent is known as Contract Rent. m) A Full Repairing and Insurance (FRI) lease is a type of a lease whereby the lessor is obliged to meet the cost of repairs and insurance. n) Direct capitalization of income considers a series of cash flows over time together with any reversion value or resale proceeds. o) Annuity N$1 will purchase is the annual income that will be purchased for a non-returnable lump sum payment of N$1, given the number of years and the rate of interest to be applied. p) An All-Risks Yield is the remunerative rate of interest used in the conventional valuation of freehold and leasehold interests, reflecting all the prospects and risks attached to a particular investment. q) The Residual Method of valuation is mostly used to value developed land or land having new or otherwise suitable buildings where the site is ripe for redevelopment. r) The Residual Method can also be used to calculate the cost ceiling for construction where land has been acquired (and is therefore a known cost) to ensure, where possible, that a reasonable profit margin is maintained. s) In calculating Gross Development Value, it will be necessary to calculate the lettable floor area and the unit letting value to find a total rental value to which is applied a yield derived both from analysis of the sale prices of other similar developments and experience of yields demanded by the market in general. t) The Profits Method of valuation is used to find the rental value and/ or capital value of a profit generating property, and is used where it is possible to use the comparative method. u) In the Profits Method a factual monopoly occurs where some legal constraint, such as the need for a license to operate certain businesses, exists to prevent competition to the property user from the users of other properties. First Opportunity Examination Page 3 of7 June 2016
VAL6105 v) An important part of the value of any type of business to which the profits method might be applied is the personality of the owner or operator. The value of the business is obtained by applying a multiplier to the goodwill. w) Mass valuation is the process of valuing a large number of properties at the same time using standardised procedures. It is the only way to complete a valuation roll. x) The four essential features of a Computer Aided Mass Appraisal (CAMA) are system values, leases, land uses and maps. y) In a Computer Aided Mass Appraisal, valuation involves automated applications of the sales comparison, cost, and income approaches to value. A good system should support all these three approaches. Question 2 a) Explain in brief the advantages of the Comparative Method of valuation. (2.5) b) Mr. Natangwe bought a house for N$700 000. You verified the sale, but you believe the house is worth no more than N$670 000. Mr. Natangwe tells you he settled on this one in a hurry because his wife was due to have twins when they moved into town. Give three reasons why you cannot accept this sale price as evidence of fair market value. (3) c) Outline the four (4) conditions that a comparable property must comply with. (2) d) A valuer is seeking a comparative transaction to help him value a 3 hectare site. He finds that a five hectare site nearby was recently sold for N$11 000 000. He estimates that that remedying the abnormal conditions (cleaning of chemicals from the soil) will cost the owner N$1 500 000. So, he implies a total market value of N$12 500 000 for the 5 hectare site. The subject site (i.e. the 3 hectare site) is in a better location where prices for equivalent property are higher so he adds 20% to the comparable value. Use the information provided to calculate the value of the subject property. (5} e) Use the dollar adjusted sales grid below to find the following: i} Total net adjustments for each comparable sale. ii} Adjusted sale prices for each comparable sale. First Opportunity Examination Page 4 of7 June 2016
iii) The most comparable property and reasons for your choice. iv) Value of the subject property which is in the same locality as the com parables. All figures in Namibian Dollars (N$) (5.5) Comparable sales Sale 1 Sale 2 Sale3 Sale4 Price 700 000 640 000 760 000 800 000 Age of sale -months 6 3 1 2 Time adjustment per 42 000 19 200 7 600 16000 month Erf size/value -10 000 8 000-2 000-12 000 Quality of construction 10000-20 000 0 20000 House size 50000 0 12 000-20 000 Condition 0 16 000 0 0 Age 20000 10000-20 000 0 Garaging -15 000 20000 0 0 Other -10 000 15 000-10 000-15 000 improvements/layout SaleS 720 000 4 28 800 0-10 000-10 000-20 000 0 10000 0 f) The area of a house has the following dimensions; 7m x 6m =42m 2 3m x 4.5m = 13.5m 2 5m x 8m = 40m 2 The cost of land improvements is 6% of the cost of the building. The house was built in 2006. The lifespan of a house in Namibia is estimated at 70 years. The plot/erf on which the house was built measures 25m x 25m and comparable land sales shows that the land price is N$150 per m 2 The construction rate per square metre is N$4 000. Calculate the Value of the property. (7) Question 3 a) Use the Quantum Deduction Rule to calculate the market value of a piece of land measuring 21 000m 2 which is to be sold to a property developer by the City of Windhoek. A comparable erf in the same neighbouhood measuring 5 000m 2 was recently sold for N$5 000 000. (6) First Opportunity Examination Page 5 of7 June 2016
b) Compute the amount of depreciation for the items below, and then compute loss due to depreciation from the house if the estimated replacement cost is N$247,000. (6) Item Reproduction Cost Percent Depreciation Bath fixtures N$1800 Carpeting N$4 200 Furnace N$2 800 Roof N$5 500 75% 50% 25% 90% c) The operating statement of the PolyHeights (freehold) is as follows: Effective Gross Income Fixed Operating Expenses Variable Operating Expenses Replacement Allowance N$480 000 N$ 50 600 N$ 70 500 N$ 28 400 Using the information provided above, calculate the following: i) Total Operating Expenses (1.5) ii) iii) iv) Operating Expense Ratio Net Operating Income Net Operating Income Ratio (1.5) (1.5) {1.5) v) Value of the property given a yield for similar type of properties being 8%. (2) d) Use the Hardcore (layer) horizontal separation technique of the Term and Reversion method, find the capital value of a freehold property having a contract rent of N$31 000 p.a. Research shows that market rental is at N$40 000 p.a. and the lease still has 2 years to run. (Hint: use a capitalization rate of 5.5% for the contract rent; and 7.5% for market rental). Explain also why the rates differ. (5) First Opportunity Examination Page 6 of 7 June 2016
Question 4 a) A developer would like you to value the land he intends to buy for development of three (3) flats, each with a sale value of N$1 200 000. Each flat has an area of 150m 2 and building costs are estimated at N$3 000 per m 2 Professional fees are 5% of building costs while interest fees on borrowed money is N$36 000 per month. Legal and Agent's fees on eventual flat sales are N$144 000 and the developer's profit is N$600 000. Advise him on the likely purchase price of the undeveloped land. The development is expected to be completed in one year. (6) b) The Estimated gross trading profit of Hotel KichwaKichwa as of December 2015 was N$2 200 000 while its estimated net profit was N$700 000. Assuming an interest on tenant's capital at N$800 000 at 12%, a sinking fund for renewal of contents at N$60 000 and a return of 9% each for the freehold and the lease, calculate the following: i) Hotel expenses (expenditure) ii) iii) Net operating profit Rent at 50% of Net operating profit iv) Goodwill at 50% v) Market value of the hotel, assuming it is a freehold and is on a 3 year lease. {11) c) What is a Computer Assisted Mass Appraisal system (CAMA) and what are its components? (4) d) Account for any four (4) desirable features which support valuation in a CAMA system. (4) All the best of luck! First Opportunity Examination Page 7 of7 June 2016