Valuation Methods - Investment Method & Comparative Method

Investment Method

The principle rests on the thesis that the capital (as opposed to rental) value of real estate will relate directly to the income that it generates or can be expected to generate. Values in the market will vary with:

a.     The quantum of income;

b.     The quality of security of the income;

c.      The duration of the income;

d.     Expectation about the future trends in the income.

These variables will be in part a function of the wider economy (market risk), in part a function of the local economy (expressed through demand and supply for the premises), and in part a function of the particular building under consideration.

Comparative Method

The most commonly used form of valuation; it uses direct comparison with prices paid for similar properties to the one being valued. This principle rests on the assumption that:

a.     Valuation is an estimate of what the market will pay;

b.    What has been paid for a similar interest in similar accommodation under similar economic conditions is the best indicator of market value.

The principle is applied as follows:

a.     The valuation for rent of common types of premises.

b.     The valuation for sale or purchase of common types of premises.

c.  The comparison of investment yields from sales of investments as described below.

d.     Sometimes in the comparison of undeveloped land prices (this should normally be checked against a residual valuation, described later).

e.   Turnover estimates for specialist premises valued on the basis of profits. The relationship between expected profits and capital values is examined later.