Books on valuation theory are very few and far between, so when a book like this comes along, one will do well to take note. The subject of current valuation theory with its roots deeply embedded in neo-classical economic theory (methodological individualism, rational choice and equilibrium) is so well established that it seems as if nothing can be further added to the subject. However, Mooya in this excellent appraisal of the current valuation theory shows that in the light of recent economic uncertainty and the focus on the role of the valuation practitioner in the cause of the dilemma, it is time to re-evaluate the theoretical roots of the valuation methods as applied today. He does so by re-evaluating the current theoretical basis and putting forth an alternative theory based on a more realistic explanation of the working of the property market.

After a quick perusal of the contents page (Google Books makes the content page and chapter 1 available) it seems as if the book speaks only to the academic world where theories are debated in stuffy university lecture halls with no regard to the real world. However, as one starts to read the first chapter you are drawn into the well laid out arguments which immediately relate to personal experiences as a valuation practitioner.

Chapter 1 is an overview of the current valuation theory and Mooya quickly arrives at the problems and controversies related to the current theory, such as the nagging question of valuation inaccuracy, value “anchoring” and client influence. He touches on the use of AVM’s and the inability of the current theory to comprehend the formation of so-called housing bubbles (viz. 2008) and the prediction of its inevitable implosion. Already in this chapter he lays out the prerequisites for an alternative theory and thereby lays the foundation for the rest of the book.

Chapter 2 is an overview of the evolution of economic value theory and is basically a condensed history of the development and the understanding of the concepts of value, utility and markets from the time of Aristotle (384 – 322 BC) up to Alfred Marshall (1842 – 1924). This chapter puts into context all those “mindless” concepts one had to memorise for the exams at undergraduate level and is therefore not only useful for current students, but also for practicing professionals who have gone through the motions of memorising these concepts without ever understanding their relevance to the practice of property valuation.

Chapter 3 is a discussion of the five methods of valuation and how they are grounded in neoclassical economic theory, but also the theoretical and practical problems of each method as it relates to the actual functioning of real estate markets. Many valuers have little understanding of the underlying economic theory which shaped valuation methodology and this chapter can therefore be of great help.
Following from chapter 3, the whole of chapter 4 is given to the discussion of automated valuation models (AVM’s) and its dependence on neoclassical economic theory. This chapter in essence proves that without the “fallacy” that price equals value, the automatic valuation model will have no theoretical basis for existence.

Chapters 5 is perhaps the most “academic” chapter in the book with a chapter heading such as Real Estate Markets and Neoclassical Economic Theory: A Heterodox Critique. However, with the assistance of Google in order to understand some of the academic jargon, this chapter will prove to be most insightful in understanding why the current valuation theory is in fact less adequate to provide understanding of property values in especially thinly traded markets.

In Chapters 6 and 7 Mooya brings his arguments together to put forward an alternative theory of market value as perceived by him.

Chapter 8 concludes the book with the application of the alternative theory with respect to thin or absent real estate markets, price bubbles and crashes, a look at the 2005 – 2008 House Price Bubble, AVM’s and the question of economic forecasting of real estate markets.

After reading this book from a practicing valuer’s perspective, I had a far better understanding why, especially in thinly traded or highly heterogeneous markets, it is so difficult to conclude a single “spot” value – such a value can theoretically not exist. However, by taking cognisance of the alternative theory put forward in this book, a single “spot” value can be applied with greater confidence – not because the book proposes a new method, but because it provides a deeper understanding of the market mechanism by providing a very plausible alternative theory.

Hopefully this book will spark a renewed debate on valuation theory on the academic level which will eventually impact on valuation methods which will in turn result in more reliable valuation reports for the users of valuation services. Each valuation office should have one on their bookshelf and valuation staff should be encouraged to read it and to engage in the valuation theory debate. South Africa has fallen behind the rest of Africa in the ongoing academic conversation on topics relating to property valuation, and it is my hope that a book such as this will inspire others to join the conversation and to make South Africa a leader in the field of property valuation.

The book, the first of its kind to proceed from the African continent, is available through Amazon from around $75.00.

This review was prepared by PT Pienaar who holds a MSc. in Property Studies from the University of Cape Town as well as a higher diploma in Mechanical Engineering from the Cape Peninsula University of Technology. He is the owner of PPE Valuations (Pty) Ltd, a valuations firm which focus on the valuation of specialised property in all sectors and in the valuation of property, plant and machinery in the industrial and agri-industrial sector.

Introduction
Retirement village developments can generally be defined as usually including a mix of independent living units (ILUs) and serviced apartments (SAs) with community facilities providing a shared congregational area for village activities and socialising (McAuliffe, 2010).
 
Very little has been published in South Africa on the valuation of retirement villages. The retirement village phenomenon is fairly new in South Africa with a recent history of not more than 30 years when the first Baby Boomers reached retirement age and available amenities (old age homes run by government and other “care” societies and groups) were found to be wanting. Developers saw a market to develop schemes tailor-made to suit the needs of middle- to upper-income retirees, and so the first privately owned and operated retirement villages, as a departure from the traditional retirement homes, were constructed. Since then there was an explosion in the construction of retirement villages.
 
Retirement village assets differ from traditional residential assets due to their operation in accordance with statutory legislation. Before one can determine the approach and method of valuation to follow, one must have therefore an understanding of the legislation and legal structure surrounding a property type and its ownership. Following is a short discussion on the legislation governing retirement villages as well as the legal structure of ownership, as envisioned by the legislation.
 
Legislation
Unfortunately, legislation does not always keep up with the pace at which the social landscape changes with the result that South Africa does not have any specific laws regulating the development of retirement villages per se as opposed to Australia and the USA where every state has its own Retirement Villages Act (Towart, 2013). There exist, however, an Act in South Africa known as the Housing Development Schemes for Retired Persons, Act No 65 of 1988, which tried to address issues regarding such schemes. Unfortunately the language used in the Act is in some respects obscure and the Act’s structure is cumbersome. The word “retirement village” is nowhere mentioned in the Act. And, yet, the Act offers substantial protection against a variety of risks to retired persons who invest in retirement schemes (Kilbourn, 2008).
Some definitions as set out in the Act is important in understanding the legal structure of the property interest.
The Act defines a “retired person” as someone who is “fifty years of age or older”. The purchaser of the housing interest need not be a retired person; anyone; regardless of age, may invest in a retirement scheme. In terms of section 7 of the Act, however, no person other than a retired person or the spouse of a retired person except with the written consent of all other holders of housing interests in the scheme may reside in a retirement scheme.
Section 1 of the Act defines “housing development scheme” as follows:
“any scheme, arrangement or undertaking-

1. in terms of which housing interests are alienated for occupation contemplated in section 7, whether the scheme, arrangement or undertaking is operated pursuant to or in connection with a development scheme (read: sectional title) or a share block scheme or membership of or participation in any club, association, organization or other body, or the issuing of shares, or otherwise, but excluding a property time-sharing scheme; or
2. declared a housing development scheme by the Minister by notice in the Gazette for the purposes of this Act;

 
“Housing interest” is defined as follows in the Act:
“in relation to a housing development scheme (that is a retirement scheme), means any right to claim transfer of the land to which the scheme relates, or to use or occupy that land”
 
“Right of occupation” is defined as follows in the Act:
“means the right of a purchaser of a housing interest-

1. which is subject to the payment of a fixed or determinable sum of money by way of a loan or otherwise, payable in one amount or in instalments, in addition to or in lieu of a levy, and whether or not such a sum of money is in whole or in part refundable to the purchaser or any other person or to the estate of the purchaser or of such other person; and
2. which confers the power to occupy a portion in a housing development scheme for the duration of the lifetime of the purchaser or, subject to section 7, any other person mentioned in the contract in terms of which the housing interest is acquired, but without conferring the power to claim transfer of the ownership of the portion to which the housing interest relates”

 
Legal Structure
It can be seen from the definition of housing interest above that two general legal structures underpinning investment in a retirement scheme (or retirement village) can be identified: “any right to claim transfer of the land” alludes to the sale of full ownership while “any right ….. to use or occupy that land” alludes to a lesser right than ownership, namely the right to occupy.
A number of legal structures on which retirement villages can be based can therefore be deducted from this definition. Broadly speaking they can be divided into three categories:

• Schemes where purchasers acquires housing interests in the form of ownership of the particular housing unit (i.e. freehold unit or a sectional title unit);
• Schemes where the housing interest on offer amounts to something less than ownership. The Act calls these “lesser rights” right of occupation, so as to distinguish them from ownership. Primary examples of such legal structures are share-block schemes (not very popular), membership of a particular retirement club, long-lease agreements, and the granting of so-called “life rights”.
• Mixed schemes which cater for both ownership and life rights.

“Life rights” take many forms and the provisions for payment of consideration for the granting of these rights also vary from scheme to scheme. In many cases, the arrangement is as follows: The “purchaser” makes a lump sum interest free loan to the developer (the purchase price). This loan is made as consideration for the right which the developer grants to the retired person, for the duration of the latter’s life, to use and occupy the housing unit and to use and enjoy the common property in the scheme and to participate in management of the scheme. It is agreed that the capital sum of the loan will be repaid to the “purchaser” upon the death of the retired person or (if the agreement provides for this) when the life right is sold to another investor (Kilbourn, 2008). An alternative arrangement can be a follows: Residents typically “purchase” their unit from the village operator, generally at a discount to the cost of similar accommodation in the open residential market. In return for this discount, the residents agree to pay to the retirement village operator a Deferred Management Fee (DMF) when they leave the village, usually upon the death of the purchaser or (if the agreement provides for this) when the life right is sold to another investor. The DMF or exit fee may be calculated as a percentage of entry contribution that was paid or the achieved resale price and may include a sharing of any capital gain and other fees and charges (McAuliffe, 2010).
 
Valuation Approach
There exists a paucity in publications on property valuation in South Africa in general and it is therefore not surprising that nothing on the valuation of retirement villages could be found. However, several journal articles and conference papers on the subject are available from outside of South Africa. These will be discussed and applied to the South African context. In Australia, for example, it is rare for a retirement village operator to sell the title of a unit. The most widely accepted model is the License to Occupy (life right) scheme, whereas in South Africa both models exist, sometimes even within the same village.
 
Elliott, et al (2002) identifies retirement villages as complex businesses being described as management intensive operating businesses with a substantial real estate element which can only be valued using the Dicounted Cash Flow (DCF) method of valuation. McAuliffe (2010) takes a broader view by dividing the retirement village into different component parts and discusses different approaches of valuation for every part. His research was based on a survey of practicing valuers registered with the Australian Institute of Valuers (AIV) with experience in the valuation of retirement villages.
 
McAuliffe (2010) identifies the following component parts:

1. The operator’s interest in the existing independent living units (ILUs) and serviced apartments (SAs) which are occupied by residents under contractual arrangements, affording the operator the right to receive income from deferred management fees (DMFs) and subsequent resales/roll-overs;
2. The resident’s interest in their respective ILU or SA subject to contractual arrangements; and
3. The operator’s interest in any undeveloped land, which may be subsequently developed with either ILUs or SAs.

 
The summated value of (a) and (c) will constitute the total market value of the operator’s interest which will include the business enterprise value and the land value while the value of (b) will represent the market value of a single unit to its occupier. The value of the operator’s interests in existing ILUs and SAs (a) are typically assessed through a Discounted Cash Flow (DCF) approach whilst the value of any surplus land (c) is typically assessed through the hypothetical development feasibility or residual approach. The direct comparison approach, which is the primary approach for traditional residential assets such as free hold and sectional title residential units, is considered as only a secondary approach in the valuation of retirement villages due to the variation in resident occupancy agreements within individual villages, let alone between different villages. Consequently the differences in entry contributions, calculation of entry fees, shares in capital gains, expected time until resident departure and expected re-sale prices, let alone differences in location, village size and quality of improvements and community facilities renders the Direct Comparison approach a secondary approach for this class of assets.
 
However, according to the Valuers that were surveyed, they may be called upon to determine the value of an individual unit or apartment (b) within a Village held under a life right. In these instances then a Valuer may rely on the direct comparison approach having regard to comparisons in terms of the village and the resident’s agreements. It is essential that in assessing the value for an individual unit, the Valuer takes into account the terms and conditions of the occupancy agreements for the units utilised as sales evidence in comparison to the subject unit and makes allowances for differences, most notably in the structure of the deferred management fees and sharing of capital gains. These differentials may be shown in a matrix format. It may be possible to have regard to sales within the same Village on similar terms, however where outside evidence is sought, the Valuer must have regard to the characteristics and peculiarities of the Villages and the terms and conditions of the individual agreements.
 
Where ownership of an individual unit or apartment is in the form of transfer of deed of a free hold or sectional title unit, the parameters for direct comparability are less strict and rely more on the physical attributes of the property.
 
Some schemes, especially in South Africa, offers a mixture of occupation types to cater to a larger market. These can include full ownership of an individual unit or apartment or life right occupation. It is therefore crucial that the Valuer confirm the legal struture of a unit before commencing with a valuation assignment.
 
A common mistake made in the approach to the valuation of a sectional title or free hold property within a scheme occupied under a life right is to apply the highest and best use approach. Under the highest and best use scenario it can be argued that the sale of the sectional title units will return the highest value and therefore this value should be deemed the market value of the unit. However, highest and best use is defined as “the reasonable probable and legal use of vacant or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value” (Appraisal Institute, 2008:277). In the case of property occupied under a “life right” agreement in a retirement village, the developer is legally prohibited under Sections 4A, 4B and 4C of the Housing Development Schemes For Retired Persons Act 65 of 1988 to sell the units in the open market and therefore a value based on the sale of the sectional title units must be excluded.
 
Conclusion
Retirement Village assets differ from traditional residential assets due to their operation in accordance with statutory legislation. In South Africa the Housing Development Schemes for Retired Persons, Act No 65 of 1988, which regulates such schemes make provision for occupation through both direct ownership and through a form of life right.
Occupation through life right greatly complicates the valuation approach for the determination of the value of both the developer’s interest and the occupant’s interest due to complex agreements which can include payment of Deferred Management Fees at the death of the occupant sometime in the unknown future. Due to these irregular and postponed payment periods the Discounted Cash Flow (DCF) approach is indicated to be the preferred method of valuation.
 
However, for the valuation of individual units occupied under a life right, the Direct Comparable Sales Approach is also indicated where there is sufficient market evidence and allowance is made for adjustments due to incomparability and displayed in the report in the form of an adjustment matrix. 
 
Units occupied under direct ownership can be valued using the Direct Comparable Sales Approach.
Extreme care is to be taken not to value “life right” units using market evidence from the sales of directly owned units.

References Elliott, P., Earl, G. & Reed, R., 2002. The Valuation Of Self-Funded Retirement Villages In Australia: Analysis, Reliability And Investment Valuation Methodology. Christchurch, Pacific Rim Real Estate Society Conference.

Kilbourn, L., 2008. Retirement Village: An introduction to their legal nature, applicable legislation and the risks faced by investores in such schemes (1). Lexisnexis Property Law Digest, June, pp. 8-12.

Kilbourn, L., 2008. Retirement Village: An introduction to their legal nature, applicable legislation and the risks faced by investores in such schemes (2). Lexisnexis Property Law Digest, September, pp. 3-8.

McAuliffe, B., 2010. Valuation Methods for Resident Funded Retirement Villages in Australia: A Practitioner’s Perspective. Wellington, NZ, 16th Pacific Rim Real Estate Society Conference.

Towart, L., 2009. Current Issues in the Analysis and Valuation of Established Retirement Villages. Australian Property Journal, 2(3).
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Towart, L., 2013. Retirement village resident duration - An empirical analysis. Melbourne, 19th Annual Pacific-Rim Real Estate Society Conference.
 
About the Author
PT Pienaar holds a MSc. in Property Studies from the University of Cape Town as well as a higher diploma in Mechanical Engineering from the Cape Peninsula University of Technology. He is the owner of PPE Valuations (Pty) Ltd, a valuations firm which focus on the valuation of specialised property in all sectors and in the valuation of property, plant and machinery in the industrial and agri-industrial sector.