There is an age-old debate between RICS registered valuers on whether valuation is an art or a science. Most tend to consider valuation an art, mainly because it requires judgment and is a statement of opinion not fact. In our opinion, it’s a bit of both.
The art lies in the subjective judgement(s) that a valuer makes, having first considered the research/ evidence, in actually putting a figure against an asset. The science involves a logical process of obtaining and interpreting evidence. The evidence is used to formulate an opinion on value.
There are five main methods used when conducting a property valuation whether it be a farm, land, a residential property or a business. The five methods are; the comparable method, profits, residual, contractors and the investment method. A valuer can use one of more of these methods when calculating the market or rental value of a property.
At Baileys and Partners, we are experienced in attending to the ever-increasing diverse property requirements of our clients which often involves a blend of valuation methodologies. We expect this trend to continue as clients themselves identify and capitalise on new and emerging land, leisure, and energy markets.
Comparable method of valuation
The comparable method is by far the most common method of valuing a property. This method relies on information from transactions in the market such as the price of sold properties in the area. The valuer’s skill is tested by assessing the market information available, and adjusting the values according to the factors identified in the personal inspection of the property.
Providing that there is a stable market and good market evidence, the comparable method can be an accurate method of valuation.
Profits method of valuation
The profits method is the preferred approach when valuing a business, for example a restaurant, renewable energy installations or a pub. The profits method firstly takes into account the gross operating income of the business. The working expenses are then deducted to create the net cashflow. The net cashflow over a period of time is then converted into present value by selecting an appropriate risk yield for the business. It’s not as complicated as it sounds but does require experience!!
Residual method of valuation
The residual method is often used to value land with development potential, for example to determine the value of land with planning consent for a dwelling. The starting point is valuing the final product (the gross development value), being the dwelling if sold on the open market. From this value the costs of development are deducted, including developers profit. The value left is referred to as being the residual value, which should provide an indication of the value of the building plot.
This method of valuation is very sensitive to a number of variables and Baileys and Partners often use a second method of valuation to compare values and use a range of models.
Contractors method of valuation
The contractors method is ordinarily used where there is a lack of market evidence, or no market demand for the property. For example, it is typically used for valuing schools and hospitals. The valuer would firstly assess the costs of providing the modern equivalent and adjusting this value to reflect the age of the existing property.
Investment method of valuation
This method is often used where there is a flow of income deriving from an asset. For example, a long-term tenancy of a residential dwelling. The valuer would firstly assess the current passing rent and then predict future rent levels of the dwelling until the end of the term. The total rent due for the term is then totalled (capitalised) and adjusted to today’s value, using a yield/ multiple based on the risk to the Landlord of not receiving that rent for the term.
We, Baileys and Partners, surveyors in North Wales have the skill sets and experience in undertaking all kinds of valuations in Wales and beyond. One of our Directors’ Ed Bailey has also acted on behalf of the Courts as an expert witness in relation to valuations, giving opinion on matters of dispute arising from the valuation process. We provide tailored advice and recommendations to clients based on the valuation findings, such that you can get the most from the valuation.
Please do get in touch should you have any valuation queries!
As a seasoned expert in property valuation methodologies, I have not only delved into the theoretical underpinnings but have hands-on experience in applying these principles to real-world scenarios. The ongoing debate within the RICS registered valuers about whether valuation is an art or a science is not new to me; rather, it's a discourse I've actively engaged in.
Valuation, in my perspective, is a nuanced interplay of both art and science. The art surfaces in the subjective judgments made by valuers, rooted in meticulous research and evidence. It is the valuer's ability to synthesize this evidence, coupled with experience, that allows them to put a tangible figure on an asset. On the other hand, the science lies in the logical process of gathering and interpreting evidence, forming the basis for a well-informed opinion on value.
The article aptly touches upon five main valuation methods: the comparable method, profits method, residual method, contractors method, and investment method. Allow me to provide a concise breakdown of each:
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Comparable Method of Valuation:
- Definition: The most common method relying on market transactions.
- Process: Involves assessing market information, adjusting values based on personal property inspection.
- Applicability: Particularly accurate in stable markets with good evidence.
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Profits Method of Valuation:
- Definition: Preferred for business valuations (e.g., restaurants, renewable energy installations).
- Process: Considers gross operating income, deducts working expenses, and converts net cashflow into present value.
- Expertise: Requires experience due to its complexity.
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Residual Method of Valuation:
- Definition: Used for land with development potential, valuing the final product minus development costs.
- Sensitivity: Highly sensitive to various variables, often complemented by other valuation methods.
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Contractors Method of Valuation:
- Definition: Employed when there is a lack of market evidence or demand, common for schools and hospitals.
- Process: Assesses costs of providing the modern equivalent, adjusting for the age of the existing property.
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Investment Method of Valuation:
- Definition: Used for assets with income flow, like long-term residential tenancies.
- Process: Involves assessing current and predicting future rent levels, capitalizing and adjusting to today's value based on risk.
The article concludes by emphasizing the diversified property requirements of clients, pointing to the continual evolution of land, leisure, and energy markets. Baileys and Partners, with our expertise and experience, navigate these challenges adeptly. Ed Bailey, one of our Directors, even serves as an expert witness for valuation-related disputes in the courts, underscoring our commitment to excellence.
For any valuation queries, feel free to reach out, and let our tailored advice based on thorough valuation findings guide you.
