ASSET VALUATION AS AN

ECONOMIC TOOL FOR

DECISION MAKING IN

EMERGING MARKETSGbenga Olaniyan Bsc MBA FNIVS FRICS RSV

ASSETS

An asset is an item of property owned by a person or company, regarded as having value

and available to meet debts, commitments, or legacies. It is a useful or valuable thing orperson. Asset valuation is a way in which the worth of a company, property, security,

antique or any other item of worth is valued. An asset valuation is commonly conducted

prior to the sale of assets mergers, acquisitions etc, or for the purpose of insuring such assets.

•An asset is any resource owned or controlled by a business or an economic entity. It is

anything (tangible or intangible) that can be used to produce positive economic value.

Assets represent value of ownership that can be converted into cash . The balance sheet of

a firm records the monetary value of the assets owned by that firm. It covers money and

other valuables belonging to an individual or to a business.

•Assets can be grouped into two major classes: tangible assets and intangible assets.

Tangible assets contain various subclasses, including current assets and fixed assets. Current

assets include inventory and account receivable, while fixed assetsinclude buildings and equipment. Intangible assets are non-physical resources and rightsthat have a value to the firm because they give the firm an advantage in the marketplace.

Intangible assets include goodwill, copyrights, trademarks, patents, computer programs, and

financial assets including financial investments, bonds

GENERAL CLASSIFICATION OF FIXED ASSETS

Land and buildings

Plants & Equipment

Chattels

Furniture & fittings

Vehicles

Valuation (Asset Valuation): An opinion of the value of an asset or liability on a

stated basis, at a specified date. Unless limitations are agreed in the terms of

engagement this will be provided after an inspection, and any further

investigations and enquires that are appropriate, having regards to the nature of

the asset and the purpose of the valuation.

THE NIGERIA VALUATION STANDARDS (The Green Book) 2019

VALUATION FOR DECISION MAKING

Who are the general users in emerging markets?

International/Institutional Investors

Home buyers

Banks

Government bodies, MDA’s and others

Stakeholders / Shareholders

All other investors

AIM OF VALUING ASSETS IN AN EMERGING MARKET

The aim of every valuation process is to derive the economic value of an object.

Valuations are conducted in a multitude of everyday situations: choosing assets for

a portfolio, during Mergers and Acquisitions, or while making investment, financing

and dividend choices. Ideal valuation tools should satisfy certain criteria: Their

theoretical foundation has to be consistent with the real-life conditions. Modelsneed to be easy to apply and simultaneously generate straightforward results.Optimal techniques will also yield a high level of transparency, by pointing out the

most relevant value drivers to indicate where management can interfere to

influence the value of the object under appraisal.

SOME QUESTIONS AND THOUGHTS

What is an ‘emerging market? Approximately 150 countries fall below conventionaldefinitions of development, though most international investors focus their attention on

some 30 countries that are in transition to higher levels of economic development. The

other approximately120 pre-transition countries also offer interesting investmentopportunities, particularly on a direct investment basis and therefore deserve research

attention in their own right. Acknowledging finer differences among these countries invites

exploration of the consistency of findings across the broader range of countries.

What are the main difficulties of investing in emerging markets? Problems of transparency,

liquidity, infrastructure, governance, and corruption, as well as their impact on pricing,

though their variations across countries and regions continue to be explored.

What are the characteristics of investments in emerging markets? In addition to the

difficulties outlined immediately above, more research is needed to understand the

basic nature of volatility in emerging markets, and the risk-return opportunity thesemarkets offer. Of special interest here is the variation of volatility and correlation with

developed markets over time.

What model will become the benchmark for estimating required returns in emergingmarkets? Professional advisers (such as Goldman Sachs and Salomon Smith Barney)

and some academic researchers seem to favor simple models that are relatively easy

to apply. However, general discussions at the same time seem to lean towards richer

approaches that recognize the risks specific to each market.

WHY COMPANIES REQUIRE VALUATION FOR DECISION MAKING

There are many reasons for valuing assets, including the following:❑ Generally, business owners who are aware of their valuation are in much better place to make decisions regarding their

company, simply because they have an understanding of the true situation of their company.

❑ In the event that two companies are merging, or if a company is to be taken over, asset valuation is important because it helps both parties determine the true value of business.

❑ An accurate valuation of a closely held business is an essential tool for a business owner to assess both opportunities and opportunity costs as they plan for future growth and eventual transition. The entire valuation process can provide an overview of strengths and weakness of the reviewed company.

❑ Business valuation determines the economic value of a business or business unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation,and even divorce proceedings.

❑ Assets valuation helps the companies to identify the right price for an asset, especially when it is offered to be bought or sold or for a lender to take a decision on an asset being used as collateral

❑ All public companies are regulated, which means they need to present audited financial statements for transparency. Part of the audit process involves verifying the value of assets.

VALUATION PRACTICE IN EMERGING MARKETS

There is currently no clear single ‘best practice’ for the valuation of assets and securities in

emerging markets. In developed markets, best practitioners and scholars seem to convergeon mainstream valuation practices. However, in emerging markets, practice varies more

widely. There is a substantial disagreement about fundamental issues, such as estimating the

cost of capital for discounting cash flows in emerging markets. Here is where data gathering

and banking can assist the development of practice.

Emerging markets differ from developed markets in areas such as accounting transparency,liquidity, corruption, volatility, governance, taxes, and transaction costs. These differences

generally affect valuations, matter in taking economic decisions, and therefore warrant

careful consideration in the application of valuation approaches.

Investment flows into emerging markets are material. According to the World Bank, duringthe year 2000, $300 million flowed into some 150 countries not regarded as developed, over

$250 million of which went into the 30 or so emerging countries most widely followed by

international investors. Though dwarfed by investment flows within and among developed

countries, flows to emerging countries are large enough that improved valuation practices

could have a material impact on the welfare of investors and their targeted investments.Not to be ignored is also humanitarian consideration: better valuation practices may

enhance the flow of investment capital, the allocation of resources, and thereby increase

social welfare in emerging markets.

TRADITIONAL VALUATION METHODS

Comparison method

Income capitalization

Discounted cash flow

Replacement Cost

Residual method

KEY CHALLENGES FACING VALUERS IN NIGERIA

Breach of set valuation standards

Compromising our professionalism

Erroneous valuation figures

Lack of information on title to properties / assets

Lack of information about the need for

asset valuation (Clients perspective)

Inadequate documentation and deficient asset records

Hoarding of valuation related information

Lack of a proper valuation database

CHALLENGES TO INVESTORS IN AFRICA AS THEY

AFFECT VALUATION.

Low level of infrastructure investment

High interest rates

Land tenure problems

Political leadership/ corruption

Currency risk

Death of house price indicators

Dubious and unprofessional valuations

BASIC EXPECTATIONS FOR ASSET VALUATION FOR

DECISION MAKERS

All physical assets must be valued by an independent, professional Valuer .

The Valuer should have no direct or indirect interest in the property to be

valued,

Only statutorily recognized professional Valuers (registered members of the

Nigerian Institution of Estate Surveyors and Valuers / ESVARBON) value physical

assets located in Nigeria,

Validity period of a valuation report should not exceed two (2) years, to take

advantage of changes in value,

The Valuer is availed adequate information, documents, and assistance to

enable him carry out a credible & realistic valuation of assets, such as;

copy of title document, survey plans, directional sketch,

access to inspect the subject asset.

HOW DO WE ACCESS INFORMATION FOR

VALUATION?

MARKET RESEARCH & DATA ANALYSIS

One of the salient duties of a Valuer to

the client is to carry out proper market

research and analysis. This is imperative

as it is a determinant to the opinion of

value and the valuation in general.

The market research which is dependent on

the purpose of valuation involves the basis of

valuation, method of valuation, field

inspection, gathering of comparables,

derivation of history of the site and the

market, market predictions/projections, etc.

HOW DEVELOPED SHOULD OUR MARKET

RESEARCH/COMPARABLES BE TODAY?

Without doubt the most accurate method of valuation in a market where data

exists is the comparison method. We will examine the kind of data available to

valuers in an advanced country.

Market research- The USA scenario

The USA

A country where you can borrow money for a down payment, get yourself a

first and second mortgage and call yourself a home owner.

Secured lending at its best!!

Valuations must therefore be spot on

EXAMPLE OF COMPARABLES USED FOR A PROPERTY BOUGHT

IN ATLANTA

The Property being valued:

Month of Purchase: April 2017

Location: Avondale Estate, Atlanta, Georgia

Price: $580,000

Description: Residential Detached 3 bedroom house, 2 baths

Size: 1988sqft

Bank Loan: 90%- $522,000

Client equity: 10%- $58,000

Year built 1963

THE COMPARABLES:

Residential Detached 3

Bedroom House with 2

Baths and Driveway Parking.

Location: Avondale Estate.

Built 1945

Size: 2010 sqft

( sold at $575,000)

Residential Detached 3 Bedroom

House with 2 Baths ,Featuring 2

Car Garage.

Location: Avondale Estate.

Built 1951

Size: 2001sqft

(sold at $575,000)

"how you gather, manage and use information will determine whether you win or

lose.“ Bill Gates

“you don’t drown by falling in the water. You drown by staying there”

MORE COMPLEX VALUATIONS.

Valuation of intangible assets is more complex and requires an experienced valuer

doing much more research and due diligence.

As valuers in Nigeria, we have continued to grow our competence in Valuation of Land,

building, plant and machinery. However, the time has come for us to own our space by

building competence in the valuation of businesses, and specialised real estate.

Case study 1 :VALUATION OF THE CHICAGO CUBS

(Professional Baseball Team)-2017

Approaches adopted:

Income Approach: 2017 projected net operating income was capitalised and further

compared with 2016 actual income. Season tickets, memorabilia, advert rights etc. were the

key income streams. Players salaries, stadium maintenance, game day expenses etc. were

the key costs.

Cost Approach: all costs of setting up a similar baseball club were considered (League entry

fees, players costs, lease, staff etc.).

It was concluded that cost approach is not valid in this case for secure lending.

A premium for joining the 2nd most expensive club 25%- 30% was projected.

“such suggestions or projections are never considered in secured lending Valuations but will

be considered in an arms length valuation”

(The RICS summit of the Americas (2017, May 1-3) First the White House, now the world series:

What’s it worth. www.rics.org)

Case Study 2: What Will The Value of This House Be?

(The White house)-2016

What Comparables Would You Use?

AN ATTEMPT WAS MADE BY SOME APPRAISERS AS FOLLOWS:

Potential Rental Income: $5m/annum

Comparables:

Donald Trump’s Mar-a-Lago Club in Palm Beach (often dubbed as White House of

the South): Valued at $100m

Hugh Hefner’s Playboy Mansion in Los Angeles: Sold at $100m

These comparables were situated thousands of miles

apart.

Ann Gray: A Los Angeles based appraiser believes that the value of The White House

would be in the region of $100million, based on her comparable analysis and potential

rental income.

Donald Trump’s Mar-a-Lago Club in Florida (which is about the same size with The WhiteHouse and often referred to as “White House of the South”) was her key comparable. The

Club which he purchased in 1984 at $10m was valued at $100m

She also estimated the potential rental income which she deduced by comparing the

income derived from Jefferson Hotel (deluxe suites rake in $1200/night at 85% occupancy

rate) against The White House’s 16-bedrooms. This is estimated to generate a rental

income of $5m/annum. This led to a value of $86m

Furthermore, she took into consideration, the construction cost of The White House in 1792

which was $232,000. Taking account of the rising cost of materials and labour today, she

estimated the cost construction to be $100m.

An average of these values gives The White House a value of about $95m

(Sonia Talati. (2016, August 13) How much is the White House Worth. www.barrons.com).

However, Cara Ameer, a Florida appraiser thinks Gray’s value is underestimated as she

believes The white House should be valued within the region of$150m- $250m

dependent on what is included in the sale.

Her comparable property was the Playboy Mansion which is less than half of The White

House in size(sitting on 5acres and is 20,000sqft) but was sold at $100m. According to

Ameer, the Playboy Mansion had a huge celebrity factor going into its sale. This she

believed The White House would also generate based on its notoriety as a property

everyone knows.

She also noted that the skills set involved to replicate some of its more unique and

historic features has become a lost art. She further stated that finding crafts people for

such unique features may be nearly impossible today.

((2016, August 19). How much would the White House be Worth. http://news.iprore.com)

ADVISORY SERVICES BY VALUERS: Feasibility, Viability

studies and valuation advisory services are constantly required for economic

decision making

It has been observed that in an emerging market like ours, a lot of individuals, corporateentities and institutions haves started looking along the line of re-purposing theirproperties in order to make such properties more viable, self-sustaining and costeffective to manage. It is also generally carried out to release the latent value ofproperties.

Re-purposing involves the full appraisal of the entire property or project and tests theversatility, resourcefulness and general experience of the Valuer. It tasks theValuer’s ability to provide advice on the most suitable option(s) critical to meeting andsurpassing the expectation of his client and achieving the overall objective of the

project.

It therefore behoves the valuer to ensure that his professional capability is not called toquestion when his advice is subjected to performance test.

Section 140.1(page 24) of our green book states “Highest and best use is the use, from a participants perspective , that would produce the highest value for an asset. Although the concept is most frequently applied to non financial assets as many financial assets do not have alternatives uses, there may be circumstances where the highest and best use of financial assets needs to be considered”.

Case study: Repurposing of a property for a religious body.

A recent study was commissioned by a large Church in Lagos to advise on the Re-purposing

of her N10B on-going Faith Based Community Center, incorporating spaces for Church

Auditorium, Offices, Shops, Cinema etc

An in-depth study of the project including the following;

Site and Location Analysis

Market Outlook of both the immediate and the extended neighbourhood of the project

SWOT Analysis of the project

Concept Design

Financials

Funding

Recommendations were given. The study ended with 5 model options out of which a

hybrid model was recommended to ensure that the project stayed in line with the

promoters strategy of viability and community centeredness.

The most significant design change advice proposed was the adaptation of the hithertobasement parking to accommodate community centeredness activities (Go-Karting,Paint Balling, Spa/Gym, Meeting Hall) and the introduction of an Astro turf at the rear ofthe building. These activities fit into the objectives of the promoters of having a balanceof community centeredness and commercial viability. A lot of the offices on the 3 upperfloors were converted into retail spaces, leaving just a few rooms for the use of theowners.

It should be noted that the center sits on a land area of approximately 39,160 squaremetres and enjoys robust parking space such that the car slots eliminated at thebasement and at the rear would have little or no impact on the parking ratio within thepremises of the center.

The 5 options created in this study were all viable models, with the hybrid being the finaloption selected and adopted. This project moving forward would earn close to N400mper annum as rental income, just from the advise of a professional valuer and thebenefit of a receptive client.

OPTION 5 (HYBRID OPTION)BASEMENT

Type Size (m2) Proposed Business

Rent/m2 (N) Rent /annum

Retail 1 142m2 Clinic 35,000 4,970,000

Retail 2 142 m2 Recording Studio 35,000 4,970,000

Retail 3 324 m2 Gym/Spa 35,000 11,340,000

Retail 4 600 m2 Supermarket 35,000 42,000,000

600 m2 Meeting Hall 48,000,000

Upper Floors 3,729.6 230,891,000

Astro turf 35,000,000

LED Screen 40,000,000

N417,171,000

Angel Investors/Sympathetic Capital Congregation Funding Forward Lease Bank Finance Church Led Initiatives Others

Example of a funding mix

HOW PREPARED ARE WE ?

Note that top players are not meant to be good at story telling. They

are good at solving problems and providing solutions!

3 points that are non negotiable!

Proposals-Our proposals must be very professional in look, feel and content.

Valuation reports- Our reports have to be in line with international valuation

standards.

Compliance- Our firms must be compliant and prepared to execute these

valuations as they come.

WE MUST DEVELOP RESEARCH CAPABILITIES IN SUB-SAHARAN AFRICA

To do this you must be informed on:

1. Country Trends

2. Real Estate Trends

REAL ESTATE TRENDS

COUNTRY TRENDS

Examples:

Inflation Rate

Performance of stocks vs Real Estate

Rate of growth in the economy

Knowledge of capital market

Expected yields on

commercial/industrial real estate

Expected yields on residential real

estate

International measurement standards

WE MUST OWN OUR INDUSTRY TO ENSURE THESE VALUATIONS DO

NOT ELUDE US!!!

THE PATH

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NOVICE WORKING PRACTITIONER SPECIALIST AUTHORITY THOUGHT LEGEND

DRONE LEADER

Series 1

FINAL WORDSIn carrying out our valuations let us remember the fallibility of the human being

realizing that while while we can analyze the past, we have to design the future.

However good our research may be, we shall never be able to escape from the

ultimate dilemma that all our knowledge is about the past and our decisions are

about the future. We must constantly refresh our knowledge and be prepared for

the future.

REFERENCESAluko BT (2007). Implications of the current trend in mortgage valuation practice in Nigeria.

International Journal of Strategic Property Management, 11:1, 17-31.

Asset Valuations and Loans Valuation. Retrieved

from http://realestateappraisial.co.uk/?page_id=415

ESVARBON (2019) - The Nigeria Valuation Standards (The Green Book)

Here’s How Much the White House Would Cost if it ever went Up for sale. (2016, August 21).

Retrieved from http://fortune.com/2016/08/21/white-house-real-estate-appraisal/

How Much Is the White House Worth? Hold On to Your Hats. (2016, August 18). Retrieved

from https://www.realtor.com/news/trends/how-much-is-the-white-house-worth/

International Valuation Standards Council (IVSC) (2011). International Valuation Standards

(IVS) 9th Edition, July 2011 , London.

Javier Gracia-Sanchez et al (2010) - Valuation in emerging markets: A simulation approach

Journal of Applied Corporate Finance https://research.cbs.dk

Nigerian Institution of Estate Surveyors And Valuers(NIESV) Faculty of Valuation and

Compensation (2017). Nigerian Valuations Standards (Draft ‘Green Book’).

Richard Li (2004) -Valuation in Emerging market https://www.research.cbs.dk

Robert F Burner et al (2002) - Introduction to valuation in Emerging Market

https://www.hbs.edu

Royal Institution of Chartered Surveyors (RICS) (2014). Valuation Professionals

Standards (the ‘Red Book’), January 2014 update, London.

You can analyse the past but you have to design the future. Retrieved

from http://www.azquotes.com/quote/729190(Accessed 2017, May 25)