Property Valuation Methods

Best suited where: Used where reliable comparable sales are available and market evidence can be analysed and interpreted.

Core valuation logic: A pattern of prices is observed from similar or substitute properties. Adjustments are then made for differences in location, condition, size, timing, rights, market conditions and purchaser motivations.

Practical caution: Comparable properties are rarely mirror-like. The skill lies in finding sales that are similar, not identical, and explaining the adjustments clearly.

This method is generally regarded as the preferred court-accepted approach because it relies on market evidence and leaves less room for excessive variables or non-market information.

Best suited where: Used where the property’s income-generating capability forms the primary basis of value.

Core valuation logic: The right to an annual income stream is converted into a capital value. Rental income is analysed, expenses are deducted and net income is capitalised by applying an appropriate capitalisation factor.

Practical caution: The valuation is only as strong as the research behind rentals, expenses, yields, capitalisation rates, tenant covenants and risk.

Although value is determined by capitalisation, the supporting information is still tested through comparison with transactions and market evidence.

Best suited where: Used where little or no market evidence exists and the property does not transact readily in the open market.

Core valuation logic: The improvements are measured, current construction costs are applied and a replacement or reproduction cost is calculated. Depreciation is then deducted and land value as if unimproved is added.

Practical caution: The depreciation analysis must consider physical deterioration, functional obsolescence and external or economic obsolescence.

DRC is typically appropriate for specialised properties that are rarely sold due to their unique nature, design, configuration, size or location.

Best suited where: Used for undeveloped land, development land or obsolescent property requiring redevelopment.

Core valuation logic: The completed development value is estimated first. Development costs, professional fees, advertising, marketing, finance costs, developer’s profit and risk are then deducted to arrive at residual land value.

Practical caution: Small changes in completed value, costs, timing, finance or profit margin can materially change the residual value.

This method is widely used by developers to determine the bid amount they can justify for a proposed development site.

Best suited where: Used where rental amounts and capital values are influenced by the property’s ability to generate business profits.

Core valuation logic: Gross annual income or turnover is estimated, cost of sales and operating expenses are deducted and the net balance is split between rent and profit. The rental element is capitalised and goodwill may be assessed at a market-related multiplier.

Practical caution: The split between property rent, operator profit and goodwill must be handled carefully to avoid valuing the same benefit twice.

An alternative application uses estimated net profit only, divides it into a rental and profit split and capitalises the rental amount to determine a “lock, stock and barrel” value.