Pricing to Market - Property Valuation Methods revisited

Nick French and Laura Gabrielli

ERES from European Real Estate Society (ERES)

Abstract: Since the global Financial Economic Crisis (FEC) hit the world markets in 2007/2008, the role of property valuation has been under greater and greater scrutiny.The process of valuation and its quality assurance has been addressed by the higher prominence of the International Valuation Standards Council (IVSC). This is a significant initiative worldwide.However, there has been little written on the appropriate use of valuation approaches and methods in market valuations.Since the publication of the IVSC Valuation Standards, there is now a hierarchy of valuation definitions. These are determined by the International Valuation Standards of the International Valuation Standards Council (IVSC, 2013). In order, there are Valuation Approaches, Valuation Methods and, as a subset of the methods, techniques or models. The IVSC recognises three approaches (Income, Cost and Market) that are all based on the underlying economic principles of price formation. The appropriate basis will vary depending on the purpose and nature of the valuation. Each of these principal valuation approaches includes different detailed methods of application and within these methods, there are different models. It may seem to be unnecessarily precise and a simply a question of semantics but it is important to have an understanding of where valuation models, as discussed in this paper, fit within the process of valuation.The hierarchy within the IVSC standards follows the convention noted below:APPROACHES (IVSC Para 56)1. IncomeThe income approach provides an indication of value by converting future cash flows to a single current capital value.2. CostThe cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction.3. MarketThe market approach provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available.METHODS1. Comparable Method (Market)2. DRC/Construction Method (Cost)3. Investment Method (Income)4. Residual Method (Income)5. Profits Method (Income)TECHNIQUES (IVSC Para 61)For example, with the Investment Method, the valuer can choose an implicit or explicit model. e.g. Implicit Capitalisation vs. Explicit DCFIncome capitalisation (implicit), where an all-risks or overall capitalisation rate is applied to a representative single period i

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2015-07-01
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