6.1 Method of Valuation
The Income Capitalization Method of Valuation will be used in the determination of the Market Value of the subject property. This method can briefly be described as follows; the net normalized income of the property is determined based on the assumption that the property is fully let at market rentals and market escalations, allowing for normalized vacancies, if applicable, and incurs market-related operating costs. The net normalized income is then capitalized into perpetuity using a market-related capitalization rate to give the market value estimate.
The capitalization rate is best determined by referring to market transactions of comparable properties as it is based on information derived from market analysis. The rate must take the prevailing interest rate into consideration. The higher the rate, the better the return an investor will require. Risk must also be included, as the risk inherent to income-producing properties is the degree of certainty that a desirable income can be realized, despite speculations in predicting the future trends.
6.2 Comments on Rentals, Expenditure, Vacancy Rate, Capitalization Rate, Bottom Slice Calculation???????OCF?
Comments on rentals
All the Rental comparable that have been provided all point to an average of a single amount that would sound reasonable even to the Subject Property. The most recent SAPOA rentals for offices around Cape Town also average the figure employed by most of the comparable rentals that were researched.
Both the Rental Comparable and SAPOA rates are on par and averagely dictate a figure of R120SQM for B-Grades offices around the area of the subject property.
The same could be said for parking bays where SAPOA rates and Rental Comparable both point to a figure of R500SQM for uncovered parking bays.
Expenditure comments
The Municipal rates are calculated at a factor of 0.014308 of the municipal valuation.
Maintenance and insurance are calculated at a rate of 0.35% and 0.2% respectively of the replacement cost.
A management fee of 3% of the gross annual income coupled with an audit fee of 1% of the gross annual income has also been included
Tenants pay for their own electricity on a prepaid basis, only a nominal amount of R1000/month is included to account for common property electricity and cleaning. The tenants clean their own spaces.
The total expenditure equates to R23.91/SQM and/or 20% of the gross annual income, which is typical for a full title property such as the subject property.
I’m attaching an income and expenditure schedule, which may help you with your PV2 assignment.

If you can’t get the contractual rental information, then I suggest that you state the leases are on a monthly basis, and therefore there is no security of tenure and you have applied market related rentals. The difficulty is know the size that each tenant occupies, but you can also make that up – if you have the total gross building area (GBA) for each floor, then you can calculate a rentable area at, say 95% of the total gross building area, and then allocate it to which tenants you want to include.

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Don’t forget to deduct a % for vacancy – I would suggest 3% to 5%.

For the expenditure – the following will apply in a full title property:

Rates – you say you know how to calculate them
City Improvement District levy – calculated similarly to the rates
Municipal utilities are typically recovered by the tenants
Insurance (as a % of the replacement cost – follow prompts in attached)
Repairs and maintenance (same as insurance)
Management fee – depends usually on how many tenants. So if only 1 or 2 tenants, then use 1.5%. I would use 3% in our calcs.
Audit fee – calculates itself as a percentage of the gross rental income (usually 0.5%).

To calculate the replacement cost – you multiply the GBA by an estimated amount to rebuild from scratch. If offices, I’d work on R8,000/m². Essentially all of your expenditure should equate to 15% to 20% of the gross income (Cell Y59 should calculate that for you). If you’re too high, then reduce the repairs and maintenance and insurance figures until you get into that range.

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