Publication Date27 Jul 2020
AuthorNick French
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Property valuation: pricing and the market
A Cynic is a man who knows the price of everything, and the value of nothing.
Oscar Wilde, Lady Windermeres Fan, 1892, Act III
I know that the quote above is semantically looking at the words priceand valuein a
deeper and wittier connotation than I will be discussing in the context of property valuation,
but it does highlight the importance of precision in language. As a veteran academic, I have
travelled far and wide in the UK and around the world listening to property investors, lenders
and valuers and I am constantly bemused at how few people actually understand value.
There are three words in common parlance in the English language (and other languages)
can commonly be used interchangeably. These are price,valueand worth. Yet in the
context of property (and economics), the words have distinct meanings.
(1) Priceis the actual observablefigure at which a propertyasset is sold in theopen market.
By definition,it is an historicfact and can only be observedonce the sale has been made.
(2) (Market) Value is an estimate of price where there is no actual sale. It is a proxy. An
estimate of the figure that would be paid for the property asset in the open market
were the property to be sold (after marketing) on the date of the valuation.
(3) Worth is a not a market-based figure. It is a subjective assessment of the financial b enefit
of that asset to a particular owner or potential purchaser at a particular moment in time.
In simple terms, an investor may look at the cash flow that a property investment generates
and calculate that the property is worth Xto them at their internal discount rate and based
on their forecasts of the future. The Open Market Valuation for the same property, however, is
X-1based on market evidence. Thus the investor will be interested in purchasing the
property; the difference being a reflection of the divergence between their forecasts and
market expectations. Conversely, if an investor thinks that that a property that they own is
worth less than the market value, then they would consider selling that asset.
Worth is the driver that stimulates offers in the market; value is an estimate of the sale
price in that market and price is the actual amount paid. These are three different concepts.
But, all of them are a specific point in time. Just as prices fluctuate in the market according to
economic conditions, so will value (as an estimate of price) and worth. Valuations do not have
shelf life. Values, as prices, go up and down.
The distinction between price,valueand worthis of paramount importance. But
sadly for every valuation user who understands the distinction, there is the same number or
more that think that value is worth or that value is an inherent number below which the
property will never be sold.
If I got a pound for every banker whom I have had to disabuse of that last statement, I
would be mortgage free and setting up my own bank. Value is an estimate of the price in the
market TODAY. Tomorrow it will be a different number. Just like with shares in the stock
market where prices fluctuate by the minute. Yet, property is seen as something different.
Maybe part of the problem is that, with property, it is not possible to observe prices changing
in real time on the screen as you can with the stock market? Maybe, it is because, property
values are seen to be something other than an estimate of price? Maybe, it is that as a
tangible asset, people think that the economy impacts on property differently to other assets?
I am not sure why. But, the bottom line is that too many educated and intelligent professionals
think that property valuation is something separate from price. It is not.
Journal of Property Investment &
Vol. 38 No. 5, 2020
pp. 397-398
© Emerald Publishing Limited
DOI 10.1108/JPIF-08-2020-168

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