Pricing to market: property valuation methods – a practical review
| DOI | https://doi.org/10.1108/JPIF-09-2020-0101 |
| Published date | 22 December 2020 |
| Date | 22 December 2020 |
| Pages | 464-480 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Laura Gabrielli,Nick French |
Practice Briefing
Pricing to market:
property valuation
methods –a practical review
Laura Gabrielli
Department of Architecture and Arts, IUAV University of Venice, Venice, Italy, and
Nick French
Real Estate Valuation Theurgy, Chichester, UK
Abstract
Purpose –Valuation is the process of determining Market Value. Property valuation, as with the valuation of
all assets, is an estimation of price in the market. It is value in exchange. The valuer role is to determine the
appropriate approach, the method and use the right model to achieve this aim as best as possible. It is a
combination of analysing the market and determining the critical variables for the valuation method/model.
The method is separate from the valuation process which should be followed (according to the International
Valuation Standards Council Valuation Standards) regardless the valuation method chosen. There are
valuation approaches, valuation methods and, as a subset of the methods, techniques or models.
Design/methodology/approach –This practice briefing is an overview of the Valuation Methods and
Models available to the valuer and comments on the appropriateness of valuation each in assessing Market
Value for specific property types.
Findings –This briefing is a review of the valuation methods and models and models that can be applied to
determine market value.
Practical implications –The role of the valuer in practice is to identify the method of valuation and then
apply the correct mathematical model for the valuation task in hand.
Originality/value –This provides guidance on how valuations can be presented to the client in accordance
with the International Valuation Standards.
Keywords Property valuation, Valuation approaches, Valuation methods, Valuation models, Market
value, IVSC
Paper type Technical paper
A cynic is a man who knows the price of everything, and the value of nothing. Oscar Wilde (1892)
Introduction
The quote above is semantically looking at the words “price”and “value”in a deeper and
wittier connotation than that of property valuation, but it does highlight the importance of
precision in language. There are three words in common parlance in the English language
(and other languages) can commonly be used interchangeably. These are “price”,“value”and
“worth”. Yet in the context of property (and economics), the words have distinct meanings.
(1) Price is the actual observable figure at which a property asset is sold in the open
market. By definition, it is an historic fact and can only be observed once 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 benefit
of that asset to a particular owner or potential purchaser at a particular moment in time.
JPIF
39,5
464
This paper forms part of a special section “Practice Briefing”.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 16 September 2020
Revised 28 September 2020
Accepted 28 September 2020
Journal of Property Investment &
Finance
Vol. 39 No. 5, 2021
pp. 464-480
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-09-2020-0101
In simple terms, an investor may look at the cash flow that a property investment generates
and calculate that the property is worth “X”to them at their internal discount rate and based
on their forecasts of the future. The Open Market Valuation for the same property, however,
may be “X-1”based 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 at 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”,“value”and “worth”is of paramount importance. But
sadly not every valuation user understands the distinction. Likewise, many clients think that
value and worth are the same thing. Or that value is an inherent number below which the
property will never be sold. Valuation, and property valuation in particular, is beset with
misunderstandings. It is therefore important that valuers are precise in the language that
they use in valuation reports and that the valuation process is clear as is the choice of
valuation approach, method and model.
Valuation standards
In undertaking the task of valuation, the valuer will be required to follow a set of standards to
ensure quality in the valuation. In most mature markets, the agreed and principal standards
are those published by the International Valuation Standards Council (IVSC) [1]; the
International Valuation Standards (IVS, 2020)[2]. These are often reproduced with the
contrary specific standards of member organisations across the globe. For example, in the
UK, the Royal Institution of Chartered Surveyors (RICSs) publishes the RICS Valuation –
Global Standards (2020) [3], colloquially known as the Red Book, which incorporates the IVSC
standards. The other main standards across Europe are the European Valuation Standards
(2016) published by The European Group of Valuers’Associations (TEGoVA) [4]. In effect,
whilst each set of standards has their differences, there is a significant degree of commonality
between all the standards and, indeed, depending upon location and the request of the client,
it is possible that a valuer may use more than one set of standards during their
professional work.
Valuation standards are the bedrock of all valuation reports and the quality assurance role
of standards ensures that the valuer should convey to the client, the approach and method
used to determine Market Value.
Market value
Valuation is, normally, the process of determining market value. This is an estimation of the
price of exchange in the market place.
Market Value is defined in the IVS (2020) as:
Marketvalue is the estimated amountfor which the property shouldexchange on the date of valuation
between a willing buyer and a willing seller in an arm’s length transaction after proper marketing
wherein the partieshad each acted knowledgeably, prudentlyand without being under compulsion.
This is a “price”definition and can easily be modified to read as “price”[changes in bold]
Price is the estimated amount for which the property did exchange on the date of sale between a
willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the
parties had each acted knowledgeably, prudently and without being under compulsion.
A review of
property
valuation
methods
465
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