Sales Comparison Approach

A Sales Comparison Approach to value, considers the sales of similar or substitute properties and related market data and establishes a value estimate by comparing the information. What the valuer is looking for is a sale of a property which is similar, not identical. This method has been held as the most reliable and accepted by courts, as less room is given to either too many variables or non-market information.

Income Capitalization Approach

The Income Capitalisation Approach is a comparative approach to value that considers income and expense data relating to the property being valued and estimates value through a capitalisation process.

This method is applied when income generating capabilities is present and is considered by the market as forming the primary basis for value. The capital value refers to the value attributed to the right of an annual income stream. This approach entails the research and analysis of transaction prices of similar or comparably substituting properties, rental rates, expense ratios, yields, capitalisation rates, tenant covenants, and risk. In essence this approach entails an income stream from which expenses are deducted and the net income is capitalised. This method is therefore a combination of income and expense data, though valued by processes of comparison.

Cost Approach

The Cost Approach calculates the current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

This method is also known as the depreciated replacement cost (DRC) method and is appropriate when little to no market evidence is available and the property does not transact readily in the market. A specialised property is a type of property that is rarely sold in the market due to the uniqueness of its specialised nature, design, configuration, size, and/or location. The approach entails the measurement of the improvements (buildings, site works) to which the appropriate construction costs are applied, resulting in the new replacement (or reproduction) cost. A depreciation factor (being composed of three factors namely physical deterioration, functional obsolescence, and external or economical obsolescence) is applied to the replacement values in order to arrive at the present day value for the improvements. The market value of the land as if unimproved is then to be determined and added to this depreciated amount with the total amount reflecting the market value for the property.

Residual Approach

The Residual Approach refers to the estimated amount that an entity would currently obtain from the disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

This method is widely used by developers to determine the value or bid amount for a tract of land with development potential. This approach is therefore applicable where a valuation is to be conducted for undeveloped land, or where redevelopment of an obsolescent piece of land demands it. The first step is to estimate the value of the development as complete. Then an allowance for development costs, professional fees, advertising and marketing costs, financing costs, developer’s profit and risk is deducted from the completed value. What is left after the deductions results in the residual value.

Profits Approach

The Profits Approach is also sometimes referred to as the accounting method. This approach states that the rental amounts and capital values of assets are usually influenced by the potential to generate profit. Therefore, profits can be used as a basis to determine the value of a property. An estimation of the gross annual income or turnover is made from which cost of sales and operating expenses are deducted. The net balance is then divided into a rent and profit split. The rental split is capitalised at an appropriate capitalisation factor. In addition, the goodwill is to be ascertained at a market related multiplier with the market value represented by the total of these two amounts. The second approach takes the estimated net profit only, divides it into a rental and profit split, and capitalises the rental amount in order to determine the value of the business “lock, stock and barrel”.