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How we value our property investments

February 19, 2018

Property Valuation

To ensure that we have an up-to-date property price we have the property surveyed once a quarter. This is done by an independent chartered surveyor. The surveyor’s report assesses the price the property would likely sell for after taking into account lots of factors, including: size of the property, number bedrooms, property condition, rental amount, and recent property sales in the area. For 8 Eden Gardens, the first surveyor’s report after the property had been purchased shows that the value has risen from the purchase price £180,000 to £185,000.

It is from this property valuation that we are able to update the figures you see in the system including investment value and share price.

This article explains the valuation process, using 8 Eden Gardens as an example. If you would like to know more about how the resale market works please see our Resale Market article.

Amortised Costs

When each property is purchased there are various costs that are involved, such as stamp duty or a repairs provision. To see an explanation of these costs see our Fees and Costs article. For 8 Eden Gardens these costs were £9,110, and with a purchase price of £180,000 this took the total required funds to £189,110. If we removed these costs from the investment value in one go it would result in an immediate drop in the investment value and the share price as soon as the property was purchased. This would create an unfair situation which would encourage UOWNers to wait until a property had been fully funded so that they could buy slightly cheaper shares without paying any of the purchase costs. To solve this issue we amortise (gradually reduce) these costs over five years. So every quarter for five years we will reduce these costs by one-twentieth, until after five years they are completely removed. In the case of 8 Eden Gardens the costs were reduced by one-twentieth to £8654.50.  

Deferred Tax

When the property is eventually sold there will be a tax payable on the gain in value of the property. For example if the value of 8 Eden Gardens increased by £10,000 (to a total of £190,000) then when it is sold there would be a tax bill of £1,700 (the sales tax rate of 17% x £10,000). We account for this tax liability by deducting the expected deferred tax amount from the investment value. This means that the investment value reflects the real value of the property to the UOWNers. Every quarter we will take the difference between the original purchase price and the new valuation, and if the property has increased in value we will calculate the deferred tax on the gain. There will be no deferred tax liability if the property does not increase in value. We use a tax-rate of 17% in our calculations because the government will be lowering the rate of tax to 17% as of April 2020 (this was accurate as of 19/02/2018). For 8 Eden Gardens the first revaluation shows the price had risen by £5,000, and this means there is a deferred tax liability of £850 (17% x £5,000).

 

At UOWN we plan for the future as much as we can in terms of what we expect the tax climate to be when a property is sold (although we can’t predict the future). It would be unfair if the people at the end of an investment term were whacked with a big tax bill that they had to pay because they were the last ones that owned shares in the property. With the way we have chosen to defer tax, we try to ensure that everyone pays their fair share of tax and the goal is that no one pays less or more than they should.

Investment Value

Once we have calculated the property valuation, amortised costs, and deferred tax we can calculate the investment value using the formula below.

Investment Value Formula

For 8 Eden Gardens the calculation is:

Eden Gardens Valuation Example
Eden Gardens worked example

Share Price

When any property is listed the share price starts at exactly £1. This makes it very easy to track how the share price changes over time e.g. a 50% increase in the investment value would lead to a share price of £1.50

In the case of 8 Eden Gardens we needed to raise £189,110 so we issued 189110 shares with a starting price of £1.

To get the latest share price for 8 Eden Gardens we use the formula below:

share price formula
Eden Gardens Share Price Worked Example
Eden Gardens worked example

This latest share price of £1.0195 reflects a 1.95% increase in the starting share price.