As somebody who has had to do this for nearly 40 years, I’ve put a little bit of thought into it.
In the absence of a market, the costs of land acquisition plus construction are the true basis. The residential land acquisition is the difficult element, but it will relate to the income that can be gained from it in an alternative use, with the ultimate one being agricultural. So the base price will be cost of agricultural land plus costs of construction (materials and labour) plus any taxes, fees, etc for permissions plus a reasonable profit element to cover the costs of capital and risk.
However, in practice these are all highly available variable and by different amounts at different times.
- Land cost — if other uses are permitted, then the base value will be higher. Depending upon the subjective attractiveness of the location, ease of access, availability of services and the like, this will vary. It will also vary depending upon the number of people who are looking for this type of property. Where there is strong demand, the subjective element will have an increased influence. The capital value should in theory depend upon the income that can be gained from investing in the property, but that again will depend upon the subjective appraisal of potential occupiers on the value of views, facilities, neighbours, environment, etc, etc.
- Construction — the cost of this will vary considerably. At times of high demand the cost of materials, labour charges and profit % will increase. However, at times like now the cost of getting work done will reduce substantially.
- Permissions, etc — these should be relatively constant.
- Profit level — this will vary from a minimum of a subsistence wage for the time of constructing the property to whatever the developer feels the market will bear.
Unfortunately, there is no magic formula for a value as one person looking at a property will place different emphasis on different elements and put a monetary value to these in relation to their existing and anticipated income and assets. That is why property is valued on a comparative basis, with the valuer judging from experience how the prudent buyer and seller will react in normal times. The RICS definition of market value is – ‘The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.’
So, valuation professional or layman will form their opinion of value based on what else the buyer could do with the money. What other property could be acquired and how does this particular property relate to all the others on the market? As in the usual supply and demand equation, if there are more buyers with finance and willingness to purchase than there are properties available for sale, there will be strong competition with the ‘winner’ being the one who offers the highest price. This thus increases prices. If, like now, there are few buyers and even less with finance and even those are sitting on their hands waiting on the market to reach bottom, sellers have to lower their prices to attract buyers with the lowest price property being the one that the prudent buyer will purchase, assuming everything else is equal.
Reliable information on actual sale prices and accurate descriptions of properties is absent in Spain. However, there are various sources from which we do obtain information, but by far the most reliable are our own building surveys and inspections in Spain over the last eight years. As our portfolio of this information increases, we are fortunate in having some true comparables that we can trust. In addition, we do obtain information from clients and reliable estate agents and lawyers with regard to the actual prices that have been paid. All that, of course, depends upon the historically ubiquitous ‘B’ money element being added in. Now, thankfully, this is reducing so that official statistics are becoming more reliable. However, it means that comparisons with registered sales in previous years that have contained a considerable amount of unrecorded ‘B’ make the statistics look very strange. So it’s not possible to rely on these to calculate present value by using the price the property was bought at a number of years ago and just applying the official percentage of increase per annum.
Judgement of the tone of the market is also essential and it varies greatly by location, even down to which side of the street the property is on. Smaller lower value properties can also be a completely different market in approximately the same location as those of larger size and higher value. In the current market smaller, cheaper properties in good locations seem to be selling as do larger ‘unique’ properties. It is the ‘middle of the road’, one of many thousands, identical property that is really suffering as the few buyers that there are have the ability to compare and negotiate so that they obtain the best at the lowest price.
So, what is value? Effectively, it is the private opinion and judgement of a buyer when considering a property as to what alternative they could spend their money on or invest it in that will give them the best return in financial and, most importantly, subjective terms. Put simply, go out and see what you can spend your money on and if a house is the thing that is going to give you the most pleasure buy that. Which house and at what price is up to you and the resources you have and the pleasures you want.