Principles of real estate valuation

There are two categories of property values insofar as land and buildings are concerned:

• Market value (sale value and rental value)
• Replacement value (gross and net replacement value)

Market value: the Charter of Property Valuation (La Charte de l'Expertise en Evaluation Immobilière) drawn up at the initiative of 14 associations of property and real estate valuation professionals, including the French National Register of Property Experts (Chambre des Experts Immobiliers de France FNAIM), to which valuers who are members of the signatory associations must refer, gives the following definition of market value: “The market value is the price at which a property or property right can reasonably be transferred in an agreed sale, at the time at which the valuation is carried out.”

Rental value: the Charter of Property Valuation (La Charte de l'Expertise en Evaluation Immobilière) gives this definition: “It may be analysed as the annual financial compensation received for the use of the property in the context of a lease.  It therefore represents the market rent which should be obtained in respect of a property under the usual terms and conditions of a lease for a given category of property and a given region.”

The market rental value may also take into account the existence of any sum or capital payment made, whether to a previous tenant (lease right), or to the owner (rent payable in advance, change of business indemnity, etc…).

The rental value is expressed in terms that are exclusive of rent payable in advance or VAT, and exclusive of rental or all other charges that are re-billed to the acquirer.

Gross replacement cost: This is the cost of the price of buying the land and the cost of constructing identical or equivalent buildings, including non-recoverable taxes, fees, duties and honoraria.

Net replacement cost: This is the gross replacement cost minus depreciation for age and obsolescence.

There are four general families into which methods of real estate valuation may be classified:

Estimation by comparison (market method): this entails deducing property values from the analysis of recent sale prices for other properties that are as similar as possible in terms of construction, state, location, known as “references” or “points of comparison”.

Estimation by revenue capitalisation: this entails capitalising or updating an annual revenue, whether an actual rent or rental value, gross or net, in order to arrive at a market value. The method is based on the assumption that the value of the property is related to the revenue that it returns (or could return.)

Estimation by replacement cost: this entails calculating the cost price of the property, deducting depreciation if appropriate. This method is little used for calculating market value.  It is more frequently used for very specialist properties or to define values for utilisation or exploitation of a property. 

“Professional” methods: For certain specialised properties such as hotels, surgeries, cinemas, theatres… the professional purposes for which the property may be used can enable the calculation of the market value or rental value of the building, or the value of the goodwill.