Property valuation in the UK. Implicit versus explicit models–the baby and the bathwater
| Pages | 397-406 |
| DOI | https://doi.org/10.1108/JPIF-04-2018-0024 |
| Date | 26 July 2018 |
| Published date | 26 July 2018 |
| Author | Nick French,Niall Sloane |
| Subject Matter | Real estate & property,Property valuation & finance,Property management & built environment |
Property valuation in the UK
Implicit versus explicit models –the baby
and the bathwater
Nick French
School of the Built Environment, Oxford Brookes University, Oxford, UK, and
Niall Sloane
Toronto, Canada
Abstract
Purpose –The purpose of this paper is to comment upon the on-going debate about the preferred use of
implicit models of valuation vs their explicit counterparts. The last few decades have seen changing
complexities in UK leasing structures, and there is a suggestion that the implicit models are incapable of
dealing with these complexities. This paper looks to address the issues and concerns with implicit models.
Design/methodology/approach –This education briefing is an overview of the pros and cons of both
models and collates comments from industry to give an indication of the use of each model.
Findings –This paper analyses the a ppropriateness of implicit model s of valuation and the areas in which
they prove useful. Alt hough the explicit models prove to be more us eful in certain situations, the implicit
models are also proved j ust as useful. The appro priate model needs to be us ed as appropriate to the
property type.
Practical implications –Rather than seeing implicit and explicit models as “rivals”, they should be seen as
two sides of the same coin. Both have advantages and disadvantages. The role of the valuer in practice is to
choose the correct model for the valuation task in hand.
Originality/value –This is a review of existing models.
Keywords Market value, Target rate, Discounted cash flow, All risks yield, Explicit valuation models,
Implicit valuation models
Paper type Viewpoint
As an art form, valuation had adopted the status of a mystical skill. Closely guarded secrets were
passed down from one generation of valuers to another, with the reason for adopting certain
practices being explained by years of accumulated wisdom (Brown, 1998).
Introduction
The International Valuation Standards Council (IVSC) recognises three main approaches to
valuation: the income, cost and market approach (IVS, 2017). All approaches to valuation are
attempting to estimate Market Value (MV ); the price of the property in the market on the
date of the valuation[1].
Within these approaches are different methods (Investment, cost, residual, accounts and
comparison) according to the property type and the nature of the property interest. In the
case of the investment method, the valuer is determining the present value of the future cash
flow and this can be done using implicit or explicit models.
As valuation is such an important aspect of the industry, great emphasis is placed on the
valuer by both the lenders and the borrowers to ensure that the valuation is correct. A model
that captures the market opinion of price as best as possible is therefore to be preferred.
This paper is looking at the investment valuation method only and within this method,
the preferred technique, in the UK, has been the implicit model.
The implicit model
In the UK, the dominant valuation model for investment properties (properties that produce
an income and capital change over time) has been the income capitalisation model.
Journal of Property Investment &
Finance
Vol. 36 No. 4, 2018
pp. 397-406
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-04-2018-0024
Received 16 April 2018
Revised 16 April 2018
Accepted 23 April 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
397
Property
valuation in
the UK
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