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Valuation Concepts: A Universal Process?

Is there a variance in valuation concepts and methodologies in different parts of the world? This is a question I had before moving to Canada.

I have had the opportunity to provide real estate Valuations in two different countries; U.A.E. and Canada. Now that I am a part of the Valuation Division at Turner Drake & Partners, I understand that there are a lot of similarities in the property interests and valuation methodologies used in the two countries.

The concepts remain the same whether it is freehold or leasehold interests – although there is a difference in the terminologies used. For example, the term “Fee Simple interest” in Canada (which offers outright ownership of a property) is very similar to the term “Freehold interest” used for properties in Dubai. Interestingly U.A.E. also has a “Non-Freehold interest”, which refers to properties that can only be owned by the Gulf Cooperation Council or U.A.E. nationals. What is this all about you ask? Well, until early 2000 the ownership of real estate in U.A.E was restricted to nationals, however in early 2000 the freehold law was introduced which allowed foreign nationals to own property in certain freehold areas of Dubai.

Leasehold interests are also similar between Canada and U.A.E, whereby a lessee (tenant) has certain right of use for a property for a specific period of time. In Canada, the term of the lease is simply negotiated between the parties however in U.A.E leasehold interests generally refer to industrial land which is leased to investors for a period of 10 years or more. Investors would construct properties for their own use or to sub-lease for rental income. A review of lease contracts in both countries shows the terms and conditions related to renewal, termination, rights of the lessor and lessee, governance, force majeure etc. are very similar and both aim to protect the rights of each of the parties of the contract.

So how do the two countries differ with respect to Valuation methodologies?  In U.A.E., we generally employed five methodologies for property valuation: the Market Approach, Investment Method, Profits Method, Residual Method and the Depreciated Replacement Cost (or Contractors) method. The Contractors method was one of last resort and was reserved for properties where no other method could be used due to lack of data or reliability.  The other four approaches were used extensively. In Canada, we generally employee three approaches to value: the Direct Comparison, Income and Cost Approaches. The Direct Comparison Approach in Canada is the same as the Market Approach in U.A.E while the Income Approach is similar to the Investment Method and Profits Method. The methodologies adopted are very similar, however there are some differences in the application.

In U.A.E., the market approach was mainly used for properties such as apartments, houses, offices, retail and development land. If there was reliable data available, this method was used to derive values of industrial properties and labor accommodation. In Canada, the same method is used to value all types of properties along with additional methods such as the Income and/or Cost Approach (when applicable). One difference that I noticed quickly when I started work in Canada was the valuation of land for residential apartments. In Dubai, we had always valued land either by plot area or permissible gross floor area (ie: value per square metre), however, in Canada it is typically valued based on the number of permitted units that can be built on site (value per unit). A new application perhaps, but still one that follows the same rules of Direct Comparison or Market Approach.

In U.A.E the Investment Method or Income Capitalization method was used to value properties having an income stream or rental income. Under this method, the value of the property is derived by capitalization of the potential rental income of a property using a market yield. This method was used for properties such as multi-unit buildings, commercial properties, industrial buildings or any property generating rental income. The same methodology is used in Canada for the same type of properties following the same concepts.

The Profit Method used in U.A.E is employed for properties having a trading potential i.e., properties that are usually sold as a part of a business such as hotels, restaurants, bars, educational facilities etc. The valuation of these properties is based on the potential operating income or commonly known as the EBITDA (earnings before interest, taxes, depreciation and amortization). Valuation of these types of properties is complex and requires a specific set of knowledge and skills. In U.A.E. we used this method to value hotels and educational institutions by employing a discounted cash flow model using a 10-year time horizon. The same concept is adopted in Canada for properties having a trading potential along with the Direct Comparison or Cost Approach.

One major difference in valuing properties between the U.A.E and Canada is the building construction! It is evident that the weather conditions of a country play a pivotal role in dictating the type of construction and materials used. For instance, in U.A.E., houses and buildings were reinforced concrete frames while in Canada, most buildings are constructed with wood/steel frame, or concrete. The biggest difference though was in the heating systems—in the U.A.E these are non-existent! With its hot climate (hitting well over 40 degrees in the summer months), U.A.E had only air-conditioning systems. As I continue to inspect different types of properties in Canada, I am being introduced to different types of heating systems, materials used and construction techniques.

The first few months at Turner Drake & Partners have definitely been a learning experience, but along with that comes a realization that valuation concepts remain very similar across the world. Yes, there may be differences such as the market dynamics, regulations, laws etc., however the basics of the real estate industry do not stop when you hit the border or jump on a plane. Conclusively, I could arrive at an understanding which tells me that the methodologies for property valuations remain the same in any part of world and it is just the application of these concepts that tends to be slightly different.

Sandeep is a member of the Valuation Division and has fourteen years’ experience oversees in the industry. In his previous role, Sandeep managed the Valuations Department for an international firm located in United Arab Emirates. His experience includes valuations of commercial, industrial and residential properties as well as feasibility studies for various developments. Sandeep can be reached at  or by phone at 902-429-1811.

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