Real estate valuation: approaches and methods

This section outlines the approaches to and methods of real estate valuation, along with examples to illustrate their use and application.

The three internationally defined valuation approaches are the market approach, the income approach and the cost approach. These valuation approaches are easily identified from their basic principles.

• The market approach uses the comparable method and market transactions.
• The income approach generally refers to the investment method – either traditional (cap rate) or discounted cash flow (DCF) – or can refer to the profits method.
• The cost approach is often taken to refer to depreciated cost methods of valuation, mainly the depreciated replacement cost (DRC) and the contractor’s method, but also includes the residual appraisal method (used for valuing properties with development potential), despite its mixed cost and value approach.

It should be stressed that the three approaches are not mutually exclusive. For example:

• parts of a property being valued may require the use of different approaches (e.g. part of a property may be let as an investment, while another may be a potential site for redevelopment), and
• it is increasingly a requirement that more than one approach or method should be used, and the results considered before reporting a value.

See Further considerations on valuation approaches adopted.

Please note that UK terminology and financial currency has been used throughout in the preparation of this material.

This section is maintained by Matthew Smith of University College of Estate Management (UCEM).

RICS standard: RICS Valuation – Global Standards (Red Book Global Standards)

RICS standard: Discounted cash flow valuations

RICS standard: Comparable evidence in real estate valuation