Editorial: Property valuation and educating the client

It is an odd thing to say, but whilst some of the most erudite people that I have met are based in practice in corporate or investment roles, too many clients of valuation reports don’t understand market valuations. They believe that it is something that it is not.

It is not what they think it is worth; it is not the cost of rebuilding the property in the case of a fire or other disaster; it is not a bookkeeping figure unrelated to the market, and it is not an average view of worth. It is simply a professional estimate of the sale price of the property on the date of the valuation. That figure, just like the prices one sees for shares on the stock exchange, is a snapshot in time and can (and will) change in the future. But, on the day of the valuation, it is simply an estimate of market price.

And, yet, the misunderstandings continue. Valuers are constantly being asked for figures and information that are out with the valuation instruction to provide the market value of the subject property. Or, as in the case with requests for “replacement” or “reinstatement” cost assessment (often, erroneously, referred to as insurance valuations), many banking clients considering making a loan on the property, as they are asking for a number to include in their “tick-boxes” on the loan application forms to allow the arrangement of building insurance.

But the professional standards worldwide are clear that this is not a valuation. For example, in the Royal Institution of Chartered Surveyors Valuation (RICS, 2024) – Global Standards (colloquially known as the RICS Red Book) – it states in the first practice statement that replacement cost estimates are excluded from the definition of a valuation. It states:

So, it should not be included in an instruction within the main report, but can it still be asked for and provided separately? That answer is not straight-forward. If the property is a “normal” residential property, there are industry-standard indices that can be consulted. However, if it is a complex residential build or, maybe, a historic mansion, then it will need expert judgement from a construction surveyor. This is outside the skill-set of most valuation surveyors who are experts in “markets” and not “rebuild” costs. And this also applies to nearly all commercial property. And, because of that, there is further guidance from the RICS on how to undertake such assessments in addition to the market valuation report. In the RICS UK National Supplement (2023) it says:

And that reinstatement cost guidance makes it clear that, for those buildings as noted above, the client needs to instruct a building surveyor or quantity surveyor with the requisite construction knowledge to provide those assessments. For such assessments to be add-ons from the valuer in the valuation report (often provided with numerous caveats) serves no one well.

Another misunderstanding by clients is their assumption that the market value is unique to them. It is not. Market value is simply an estimate of the likely sale price on the date of valuation. That is different from the question “But what is it worth to me?” That is a separate estimate based on client-specific estimates of how the property investment (or corporate) asset will perform in the future. This is not the market expectations of rental and capital growth captured in the market value; this is client-agreed forecasts based on their own forecasts. And, unsurprisingly, even if you use the same mathematical model (implicit or explicit), as soon as you vary the inputs, then the resulting figures diverge. In this case, market expectation inputs give you market value (an estimate of price) and client-derived forecasts will give you the worth of that property to that client. If the former is higher than the latter, the owner may consider selling; if the worth is higher than the current market price, then, all other things being equal, the owner will retain the asset.

What is interesting, following the RICS Independent Valuation Review (2021), there was definitely a recognition of a related misunderstanding. Some respondents seemed to believe that if valuers moved from implicit capitalisation models to explicit DCF models for valuations, then the figure provided would change dramatically. This is not the case. As the word “model” suggests, the valuation technique used models the market. The market-derived inputs into the implicit model are, in fact, the same as those for the explicit model, and thus, the valuation figure is the same in both models. The advantage of an explicit DCF model is that it allows clients to see the assumptions that are implied in the simple capitalisation model and compare them to their own forecasts, but the DCF model itself doesn’t change the market value.

The final misunderstanding that I am discussing is the widespread belief that a valuation carried out using the cost approach (where the value of the asset is based on the build cost of a new version of the same minus depreciation) is not a market valuation. All market valuations are attempting to estimate market value. The difference is some methods are more robust and based on more market evidence (which, remember, is not universally available in every country or market) than others and thus the certainty that the valuation figure derived would exactly match the sale price were the property sold in the market on the date of the valuation varies between the methods used. A market approach using recent transactional evidence is more likely to be accurate than a cost approach based on the depreciated replacement cost. Neither is wrong but the valuer uses the approach that is best for the market in question. But, to repeat, all market valuations are attempting to estimate market value. To suggest that a figure derived from a cost approach is only a tick box exercise for accountancy, again, shows a complete misunderstanding of valuations.

So, what can be done? I guess it is a question of more and more education and a move towards more and more clarity and explanation in valuation reports. Specific guides for clients are definitely something that the RICS and other professional bodies will be promoting further in years to come, and without a doubt, better people than me will continue to write articles to try to clarify and correct these misunderstandings.

Real Estate Valuation Theurgy, Chichester, UK

May 2025