Valuation

RICS Methods of valuation

Introduction

The purpose of a valuation determines the definition or basis of valuation to be applied, and the valuer can then select an appropriate method. There are five methods of valuation, which have been recognized for a century and a half or more. The principles on which they are founded have not changed, although there have been some developments of detail.

The five methods or principles are:

1. The Comparative Principle

2. The Investment Principle

3. The Residual Principle

4. The Profit Principle

5. The Cost Principle

Summary

This paper considers the traditional valuation methods employed widely in practice in the UK.

1. The comparative principle is applied on the assumptions that the valuation obtained is an estimate of market price and that what has been paid for very similar property interests will be paid for the property being valued.

2. The investment method derives the capital valuation of a property interest from the income stream, which the property generates or is expected to generate in perpetuity. The process involves the all risks yield as a capitalization rate, from which a multiplier, or Years’ Purchase, is derived. This is then applied to the property’s rental value to obtain its capital value. Rental growth is implicitly assumed in the choice of yield.

3. The use of DCF methods involves the use of the investor’s cost of capital in place of the all risk yield and explicit rental growth. Since different investors may have different costs of capital, the method is, strictly speaking, a calculation of worth to that investor.

4. The residual principle is...