Many people wonder why one plot will command a higher price than the other or why one apartment will be sold at a higher price than the other in the same vicinity or even the same compound. In order to appreciate why these differences arise, it is important to understand the concept of value.
What is Value?
Value is the measure of benefits provided by a good or service to its user, expressed in monetary terms to facilitate exchange.
Market value is defined as the estimated amount for which a property would exchange on the date of valuation between a willing buyer and a willing seller, both having full knowledge of the market and acting prudently without pressure.
Ideally, property value should be objective. However, it is influenced by four key factors: Demand, Utility, Scarcity, and Transferability.
Demand
Demand is the desire and ability to pay for a property. Generally, attractive properties generate higher demand because many people want to own them.
According to the principle of demand and supply, when demand increases while supply remains constant, prices rise. Since land supply is fixed, growing demand inevitably pushes property values upward.
“Though it appears that the value of a property may lie in the eye of the beholder, value can only be assessed by trained, certified and registered property valuers.
For instance, imagine the many families visiting new residential projects on weekends. Their curiosity shows a desire to own property, but not all of them have the financial ability to buy—so true demand is lower than it appears.
Utility
Utility refers to the ability of a property to provide the expected benefits or usefulness to its owner.
In real estate:
- For rental property, utility is the ability to generate rental income.
- For hotels, utility lies in offering the comfort and serenity guests expect.
Example:
Two families buy similar upmarket apartments on the same floor.
- Family A closes off the open-plan kitchen and adds a Jacuzzi and walk-in closet in the master suite.
- Family B leaves their unit as-is.
All other factors being equal, the added features in Family A’s unit make it more desirable, increasing its rental income potential and resale value.
Scarcity
Scarcity has to do with how rare a product is. If the said property is in short supply, demand will be high since it elicits desire in many people to acquire. Why? This is because anything that can be easily obtained is never considered of high value. This then means that the few prime properties command higher prices since they are limited.
A good example is the proliferation of apartments in Kilimani, an area of the city which has hitherto commanded high apartment prices. In the recent past, foreign investors – especially the Chinese, have constructed several apartment blocks at a lower cost thereby reducing their prices and overall values of existing units. The same has been seen in the office space market segment whereby several office blocks have been put up in Upper Hill and Westlands and thereby increasing the stock of office space. This in turn depresses values.
Transferability
Transferability is the ease with which property ownership can be transferred from one person to another. Investors prefer properties that can be sold quickly and without complications.
Transferability depends on:
- Legal requirements
- Type of lease
- Regional moratoria
- Family approvals or land disputes
For example, land requiring Land Board consent or family agreement takes longer to transfer, making it less appealing to investors seeking quick turnover.
Transferability is arguably the most important indicator of value in real estate. We all probably know a family living in shanties built on their own family land of tens even hundreds of acres. Until these families can sort out issues hindering transfer of such property – no matter how prime, no sale can proceed.
Valuation in Kenya
While it appears that the value of a property may lie in the eye of the beholder, it is important for investors to be guided by facts and not by impulses because real estate investments can be high risk. Any property that is located in an area with high demand, provides the intended utility and is easily transferable is bound to command higher value. It should also be noted that value is not the same as the cost or the price paid for a good or service. Value is inherent, and can be better seen as the benefits to be accrued from a property in the future.
In Kenya, property value can only be assessed by trained, certified and registered property valuers using any one of the many valuation approaches to meet the specific need. Valuations can be procured for: sale, insurance, liquidation, investments, inheritance, mortgage etc. Feel free to reach out to the Citiscape Valuation Department for all your valuation needs.
