Valuing specialised property: cost vs profits method uncertainty
| Published date | 05 September 2016 |
| DOI | https://doi.org/10.1108/JPIF-06-2016-0048 |
| Date | 05 September 2016 |
| Pages | 655-663 |
| Author | David Jansen van Vuuren |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
PRACTICE BRIEFING
Valuing specialised
property: cost vs profits
method uncertainty
David Jansen van Vuuren
Specialised Valuers, Cape Town, South Africa
Abstract
Purpose –The purpose of this paper is to compare the value outcomes of the cost approach to the
DCF profits method when valuing specialised property under different scenarios as a test for choice of
method or model uncertainty; and to quantify valuation uncertainty under each scenario and to argue
for an increasing adoption of the profits method of valuation.
Design/methodology/approach –A qualitative case study approach was used to analyse four
physical valuations performed in practice under four specific scenarios, namely, a business-as-usual
scenario, an underperforming business scenario, an expanding capacity scenario and a combined
business-as-usual funding a start-up joint venture scenario.
Findings –The cost approach relative to the DCF profits approach consistently under-values
specialised property under business-as-usual and business expanding scenarios while it over-values in
instances of underperforming business scenario.
Practical implications –Financial institutions that predominantly uses or accepts the cost approach
for valuing specialised property should consider adopting the DCF profits approach as the default
approach when valuing for mortgage lending purposes. Business owners of specialised properties
should contract practitioners knowledgeable and skilled in the application of the DCF profits method.
Originality/value –This paper quantifies choice of method or model uncertainty of four different
scenarios of specialised properties where both the cost approach and DCF profits methods of valuation
were employed.It suggests the adoptionof the DCF profits method as the defaultmethod of valuation for
specialised propert y.
Keywords Uncertainty, Profits, Specialized, Model, Cost, Method
Paper type Case study
1. Introduction
The valuation of specialised properties is generally still predominantly performed by
using the cost approach of valuation, not only in the UK, as reported by French (French
and Gabrielli, 2007, p. 523), but also in South Africa and possibly around the world.
In most instances, the DCF profits method of valuation should be the preferred method
for specialised properties. However, client instruction or practitioner knowledge could
potentially contribute to the lack of adoption of this method.
In order to bolster the case for the DCF profits method of valuation as the preferred
method when valuing specialised property, this paper will review four cases of physical
valuations performed in practice of specialised properties where both the cost approach
and the DCF profits methods were employed. The paper will then contrast the value
outcomes of both approaches and quantify the valuation uncertainty attributable to the
choice of method or model uncertainty. In conclusion, the argument will be made that
valuation uncertainty is mostly a result of trying to reconcile the cost approach with the
DCF profits method. Resultantly, rather than continuing with the cost approach as the
default approach, a switch to adopt the DCF profits method should be made.
Journal of Property Investment &
Finance
Vol. 34 No. 6, 2016
pp. 655-663
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-06-2016-0048
Received 30 June 2016
Accepted 13 July 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
655
Valuing
specialised
property
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