Property

Abstract

We start by reviewing when valuation is needed—when property is measured using the revaluation model under IAS 16 or under the fair value model for investment properties under IAS 40, and for impairment testing. We proceed to discuss the concept of “highest and best use” in the particular context of valuing land. We outline three approaches to property valuation—the market, income and cost approaches. Under the market approach, we discuss the comparable transaction approach and the multiple regression approach. The comparable transactions approach values a property using the adjusted recent sales price of a similar property. In this context, we discuss two rules for measuring similarity between properties—the Euclidean norm, and the Minkowski p-norm. Multiple regression analysis values a property using data on the prices and other attributes of a number of other properties in the neighborhood. It seeks the pricing model that best fits actual data on pricing and these attributes from recently sold properties. We study two regression approaches—the standard ordinary least squares (OLS) approach and a spatial regression approach, geographically weighted regression. We turn next to income-based approaches, which derive the fair value of a property by capitalizing rental income from the property. We discuss two broad approaches—direct capitalization, which applies a standard multiple or rate based on the rental income, and yield capitalization, which applies a discounted cash flow methodology. Finally, we discuss the cost approach, which values a property at the replacement cost. This approach starts by estimating the required outlay for a brand-new replacement property (“duplication cost new”) and then applying a series of adjustments for the loss of value due to factors such as age.