• What are valuations or appraisals?
• Why is there a demand for valuations?
• Why is there a (growing) demand for analysis
of worth or Investment Value?
• Price - exchange value
• Value – exchange or use value
• Valuation - prediction of exchange price
“The estimated amount for which a property should
exchange on the date of the valuation between a willing
buyer and a willing seller in an arm’s-length transaction
after property marketing wherein the parties has each
acted knowledgeably, prudently and without
Role of valuations
• Financial reporting and legal/statutory
• Transaction related
• Performance measurement
Global definition of Investment Value
• The value of the property to a particular
investor, or class of investors, for identified
Role of Investment Value calculations
Identifying over or underpricing
Choosing between competing assets
‘Customising’ investment analysis to specific
circumstances of the investor
• Distinction between price and worth
• Valuers’ role has been concerned with price.
• Increasing demand for analysis of prices and
calculations of worth
• Market worth - based upon the assumption
that there is mis-pricing in the commercial
The Five Methods of Valuation
• Applications - when are they used?
• Methodologies - how are they used?
• Limitations - what are the problems with using
• NB - read recommended texts in conjunction
with the notes
• Will be further developed in Year 2
The five methods
The investment or income method
The residual method
The comparison method
The contractors or cost method
The profits or accounts method
NB - they are not mutually exclusive
• Used for the rental valuation of many types of
commercial properties (in UK).
• Used for the valuation of residential property
• Often used as a ‘check’ on other methods.
• Globally - is most widely used for all types of
• Arguably most valuation methods have strong
elements of comparison.
• Market transactions (deals) provide evidence
of prevailing values.
• This evidence is then applied to the subject
• Appropriate adjustments are made where
• What does heterogeneity imply?
• Land - with development potential
• Buildings with redevelopment potential
• Incorporated into methods which require a
• Calculate value of development
• Calculate cost of development - including
profit as a cost
• Difference is the remainder that is available
for the purchase of land.
• There is substantial uncertainty about the
level of costs and revenues
• Techniques commonly used have some
• However, these technical weaknesses may not
• Derived from mainstream finance.
• Focus on the income.
• Value of an asset reflects the present value of
future income flows.
• Used for commercial properties which
generate a rental income.
• Most important method.
• A number of variants.
• Basic approach - apply a capitalisation rate to
• Rents are set in the lease or obtained from
• Yields or capitalisation rates are obtained
• We’ll see that the cap rate or yield is really a
Similar to comparison approach
Relies on market evidence
Specialist purpose built
Unusual - one off
US - a mainstream
Cost of rebuilding plus
Cost of land minus
Existing use value
See Red Book definition
Inputs are difficult to calculate
Apart from costs data
• Business and property are closely linked
• Income payable is a function of the
profitability of the occupying business.
• Income is capitalised to give a capital value.
Rent = Gross Profit - (Net Profit + Tenant Allowance)
Gross Profit = Gross earnings less purchases
Net profit = Gross profit less operating expenses
Tenant Allowance = Tenant’s salary, interest on
tenants investment and risk allowance
• Capital value = Rent/ capitalisation rate
Retrospective - historic accounts.
May be misleading or inaccurate.
Trading performance issue.
Alternative approaches increasingly used
• There is an important distinction between
price and worth
• A valuation is an attempt to estimate market
• A calculation of worth can be used to analyse
• There are five methods of estimating price or