The Quality Rating System in Real Estate Valuation in Estonia

1. The Quality Rating System in Real Estate Valuation in Estonia Ene Kolbre Tallinn University of Technology e-mail: ene.kolbre@tseba.ttu.ee Veronika Ilsjan Tallinn University of Technology e-mail:veronika.ilsjan@gmail.com

2. Current situation • Real estate appraisers and market analysts in Estonia use various indicators to characterise the quality of real estate, and even those were mainly for offices and commercial real estate. • The need to harmonise and ensure unambiguousness of the quality rating led to working out a new quality rating system for real estate valuation.

3. The basis of the new rating system • Quality grade that serves as the basis for the new rating system shows the competitiveness of the real estate object to be attractive for similar types of lessees or buyers. • Quality grade is a complex indicator that represents a combination of factors that characterise the income potential and value of the real estate and market expectations for these indicators.

4. The basis of the new rating system • As market demand is the main factor influencing income potential and sustainability of a real estate, then the quality grade is determined on the basis of market demand principle. • Quality grade for a real estate object is determined on the basis of its income potential, taking into consideration the sustainability of the object, i.e. every factor has to assessed based on the principles of sustainable development and saving use.

5. Income potential • Income potential is evaluated on the basis of the following characteristics: • location and use of the plot, • quality of construction, • real estate management.

6. Graduation • For determining the real estate quality grade a rating will be given separately to each attribute in a three point system • A, B and C where A is the highest and C the lowest • Aggregate rating of the real estate is the evaluation result of three attributes (for example, ABB; BBC).

7. Graduation • Valuation of each attribute • location and use of plot • quality of construction • management of real estate is based on the factors that influence the respective attribute, which are also evaluated in A, B, C system.

8. Evaluation • The choice of factors influencing the attributes depends on the type of object to be valued • residential, office, commercial, storage and production properties. • The factors are evaluated using a relative measure, forexample • high demand (A),medium demand (B), low demand (C) or • good (A), satisfactory (B), bad (C)

9. Evaluation • The final rating of the attribute is calculated as a sum of grades of individual elements on the basis of dominating valuation results, taking into consideration their influence on the object’s value. • The calculated final grade is based on expert’s experiences, knowledge and logical arguments rather than mathematical calculations.

10. The quality factorsof location and plot

11. The quality factorsof location and plot

12. The quality factorsof location and plot

13. The quality factorsof location and plot • Otherfactors • Infrastructure for public services in the vicinity (schools, kindergartens, shops etc) • Greenery and maintenance of the region • Security • Light traffic roads and public recreation grounds (playgrounds and sports grounds, dogs exercise areas etc) • Total number of factors 17

14. The quality factorsofconstruction

15. The quality factorsofconstruction

16. The quality factorsofconstruction

17. The quality factors of management

18. The quality factors of management

19. The quality factors of management

20. Sustainability • It is an important principle that rating of the factors takes into consideration sustainability of the real estate object. • By sustainability of real estate we mean purposeful real estate development that would ensure improvement in the quality of the property in agreement with the sustainable development principles.

21. To evaluate sustainability the following planning, architectural and construction principles are taken into consideration • reasonable use of the environment, i.e. solutions and means to reduce expenses that would yield best results in terms of sustainability; • maximising landscape quantity and quality options; • using systems and solutions that enable saving use of water; • energy and fuel saving and protection of the atmosphere; • saving use of materials and resources.

22. Problems • Assessment of the quality grade using this methodology is • labour intensive • quite complicated • requires extensive knowledge and experience

23. Thank you!