Application of income capitalization approach for emerging rental income cash flow in Enugu metropolis property market

Abstract

Purpose

The purpose of this research is to ascertain the extent to which the income capitalization approach reflects the pattern of emerging rental income in Enugu property market.

Design/methodology/approach

The survey research design was used in this study. Data from the field was gathered through a data collection pro forma administered to 40 valuers in Enugu metropolis in the manner of conducting interviews. This study used key valuation details of 54 sampled income generating properties valued by the respondent valuers between 2015 and 2022 using the income capitalization approach. The same sampled properties were then revalued by the researchers using annuity due assumption/formulas of the income capitalization approach. Descriptive and inferential statistics were used to analyze the data.

Findings

The study revealed that the income capitalization approach used by most valuers in Enugu does not reflect the property rental income pattern prevailing in Enugu property market where rents are paid in advance. The study further shows that the application of the income capitalization approach for valuation of annually in-advance property rental income cash flow results in a higher capital value of 3.49% in Enugu property market.

Research limitations/implications

The limitations to this study are that past valuation done by valuers were used in the analysis instead of actual property sales and a relatively small number of sampled valuers and properties are used in the study The implication of the study is that ordinary annuity assumptions or formulas is inaccurate and not suitable for valuation of income generating property in an emerging market like Nigerian where timing of cash flow is annually in advance. Based on the result of this study it seems that ordinary annuity approach negate the principle of estimating value using income capitalization method by converting future cash flow from income generating property into an estimate of property value.

Practical implications

The study advocates the adoption of the use of annuity due formulas in the valuation of income generating properties in Nigeria as its practice standard to avoid undervaluation as this assumption is logical and provides more accurate value due to prevailing lease structure and rent payments patterns in the country. The implication of the study is that the use of ordinary annuity assumptions or formulas is inaccurate and not suitable for the valuation of income generating property in an emerging market like Nigerian where timing of cash flow is annually in advance.

Originality/value

This is one of the very few empirical studies carried out in Nigeria to ascertain the extent to which the income capitalization approach used by valuers reflects the rental income pattern that prevails in the Nigeria property market.

Citation

Ifeanacho, K.P. and Egbenta, I.R. (2023), "Application of income capitalization approach for emerging rental income cash flow in Enugu metropolis property market", Property Management, Vol. 41 No. 3, pp. 454-471. https://doi.org/10.1108/PM-05-2022-0037