Apportionment in property valuation: should we separate the inseparable?

Abstract

Purpose

Property valuers are often asked to allocate portions of the market value of a property to parts of the subject property. This paper aims to illustrate that the market value of a property cannot be divided into a market value for the land and a market value for the improvement.

Design/methodology/approach

Apportionment methods that exist in practice are briefly addressed and shortcomings are identified. Also theory that was developed for valuation and apportionment purposes is discussed and evaluated. From a combination of theory and practice conclusions are drawn and recommendations are made.

Findings

The combination of theory and practice show that the existing apportionment methods are unreliable tools for property analysis. Some suggestions are made concerning tools that might replace apportionment in property analysis.

Practical implications

Apportionment plays an important role in property investment and finance decisions. Due to the International Financial Reporting Standards (IFRS) apportionment will have a strong role to play in financial reporting and through this it will influence management and investment decisions indirectly. This paper shows that apportionment methods are not reliable and that important decisions should not be based on results from apportionment methods. Valuers should no longer supply these apportionments unless the client fully understands the shortcomings of the method used. On the other hand, clients, their advisors and auditors should no longer ask for value apportionments, as there are far more reliable alternatives.

Originality/value

The property profession has been struggling with apportionment theory for years. At this time IFRS introduces a strong need for value apportionment. Therefore, this is the time for the property profession to thoroughly investigate the shortcomings of existing apportionment methods and to come up with alternatives. This paper is an attempt to do just that.

Citation

Hendriks, D. (2005), "Apportionment in property valuation: should we separate the inseparable?", Journal of Property Investment & Finance, Vol. 23 No. 5, pp. 455-470. https://doi.org/10.1108/14635780510616043