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Article
Publication date: 26 July 2018

Nick French and Laura Gabrielli

Since the global financial economic crisis hit the world markets in 2007/2008, the role of property valuation has been under greater and greater scrutiny. The process of valuation…

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Abstract

Purpose

Since the global financial economic crisis hit the world markets in 2007/2008, the role of property valuation has been under greater and greater scrutiny. The process of valuation and its quality assurance has been addressed by the higher prominence of the International Valuation Standards Council (IVSC). This is a significant initiative worldwide. However, there has been little written on the appropriate use of valuation approaches and methods in market valuations. There is now a hierarchy of valuation definitions. In order, there are valuation approaches, valuation methods and, as a subset of the methods, techniques or models. The purpose of this paper is to look at the importance of identifying the appropriate approach to be adopted in market valuations and the methods, techniques and models that should be applied to determine market value.

Design/methodology/approach

This practice briefing is an overview of the valuation approaches, methods and models available to the valuer and comments on the appropriateness of valuation each in assessing market value.

Findings

This paper reviews the IVSC-recognised approaches and prompts the valuer to be careful with the semantics involved so that they are better placed to provide an unambiguous service to their clients.

Practical implications

The role of the valuer in practice is to identify the appropriate approach for the valuation of the subject property, choose the right method and then apply the correct mathematical model for the valuation task in hand.

Originality/value

This provides guidance on how valuations can be presented to the client in accordance with the International Valuation Standards.

Details

Journal of Property Investment & Finance, vol. 36 no. 4
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 14 August 2007

Nick French and Laura Gabrielli

In January 2005, the International Valuation Standards Committee (IVSC) published the International Valuation Guidance Note No. 8 entitled The Cost Approach for Financial

2580

Abstract

Purpose

In January 2005, the International Valuation Standards Committee (IVSC) published the International Valuation Guidance Note No. 8 entitled The Cost Approach for Financial Reporting – (DRC). This guidance note provides background to the use of depreciated replacement cost (DRC) in connection with International Valuation Application 1 (IVA 1), Valuation for Financial Reporting and suggests that the valuer reports the result of a DRC valuation as market value subject to the test of adequate profitability or service potential. This suggestion has caused a lot of debate and consternation in the UK where the DRC approach has always been considered as a method of last resort and not a market valuation. However, in continental Europe the cost approach (DRC) is often the principal method of valuation and has always been considered to produce market value. The purpose of this paper is to discuss the impact of this change to valuation practice in the UK.

Methodology/design/approach

In this paper, we discuss the concept of market value and its relationship to DRC in an attempt to identify the principal areas of concern in the UK and, through the use of an Italian case study, show how the DRC approach can be adopted as an appropriate method (not basis) for calculating Market Value.

Findings

It is probable that most valuers will still provide the DRC valuation using exactly the same calculation as they did before. They are likely to provide the same (relative to the valuation date) figure; the difference is that they will feel less easy about the robustness of that figure

Originality/value

It is argued that the UK market has, for too long, hidden behind DRC being a basis of value that UK valuers now feel uncomfortable in reporting DRC as market value. They are uncertain with the valuation figure. However, this uncertainty can be addressed in other ways and a suggested “solution” to help the valuer overcome their discomfort with the market valuation is proffered.

Details

Journal of Property Investment & Finance, vol. 25 no. 5
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 1 December 2004

Nick French

Provides a brief overview of the methods that used in real estate valuation with a particular emphasis on the valuation of specialised property. Proposes that the underlying…

9773

Abstract

Provides a brief overview of the methods that used in real estate valuation with a particular emphasis on the valuation of specialised property. Proposes that the underlying requirement is to estimate market value and that the role of the valuer is to choose the method that is the best model to achieve this objective. Concludes that a valuer must work with the recognised techniques and, in the case of specialised property, these are methods that go back to analysing value from first principles by identifying the value of the property to the business.

Details

Journal of Property Investment & Finance, vol. 22 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 13 March 2023

Hanieh Hekmat, Ali Rahmani and Hassan Yazdifar

This study aims to highlight the accuracy, performance and selection of the IPO valuation methods in the Islamic Republic of Iran’s emerging market.

Abstract

Purpose

This study aims to highlight the accuracy, performance and selection of the IPO valuation methods in the Islamic Republic of Iran’s emerging market.

Design/methodology/approach

The authors performed accurate ex ante evaluations based on a pre-IPO data set obtained from valuation institutions. This study considered valuation methods through correlations, Mann–Whitney U tests and regression analysis, using a sample of 83 IPOs from January 2017 to March 2021.

Findings

The authors found that the dividend discount model (DDM) was the most popular in Iran. Even after controlling firm characteristics and market circumstances, the IPO price was highly correlated to pre-IPO reports’ estimates. The results showed that firms’ age, size and profitability affected the selection of valuation methods. The valuers did not apply forward P/E in a volatile market. Firm size affected the weights assigned to free cash flow to the firm, and the valuers considered the asset-in-place intensity to determine the weights of DDM, P/E and net asset value, and they mainly used the P/E to value old firms. Finally, this study estimated the accuracy of the pre-IPO report at 61% and found the highest accuracy to be associated with DDM.

Originality/value

IPO pricing in emerging markets constitutes a more significant dilemma than in developed markets. This paper provides empirical evidence of IPO pricing focusing on valuation methods used in the context of an emerging market – the Islamic Republic of Iran.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 16 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 25 September 2009

Peter Wyatt

Several problems arise from the current valuation standards and guidance in relation to the replacement cost method and they can be classified as definitional and methodological…

2542

Abstract

Purpose

Several problems arise from the current valuation standards and guidance in relation to the replacement cost method and they can be classified as definitional and methodological. Definitional problems include confusion over the precise meaning of the terms cost, price and value and clarification of the economic concepts of substitution and “highest and best use” in the cases of market‐based and replacement cost methods. Methodological problems include the difficulty in finding market‐derived inputs, particularly when estimating depreciation, and the need to make end adjustments. These matters raise the question as to whether a replacement cost method is compatible with a market basis of value. This paper aims to address this issue.

Design/methodology/approach

The paper reviews academic literature and professional practice guidance in relation to the replacement cost method of valuation and the market value basis of valuation.

Findings

Defining replacement cost as a method of estimating market value rather than a separate basis of value blurs the distinction between cost and value. This paper argues that market value assumptions do not hold in the case of the replacement cost method.

Originality/value

The paper seeks to stimulate debate on the current professional guidance for the use of the replacement cost method of valuation.

Details

Journal of Property Investment & Finance, vol. 27 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 5 September 2016

David Jansen van Vuuren

The purpose of this paper is to compare the value outcomes of the cost approach to the DCF profits method when valuing specialised property under different scenarios as a test for…

2001

Abstract

Purpose

The purpose of this paper is to compare the value outcomes of the cost approach to the DCF profits method when valuing specialised property under different scenarios as a test for choice of method or model uncertainty; and to quantify valuation uncertainty under each scenario and to argue for an increasing adoption of the profits method of valuation.

Design/methodology/approach

A qualitative case study approach was used to analyse four physical valuations performed in practice under four specific scenarios, namely, a business-as-usual scenario, an underperforming business scenario, an expanding capacity scenario and a combined business-as-usual funding a start-up joint venture scenario.

Findings

The cost approach relative to the DCF profits approach consistently under-values specialised property under business-as-usual and business expanding scenarios while it over-values in instances of underperforming business scenario.

Practical implications

Financial institutions that predominantly uses or accepts the cost approach for valuing specialised property should consider adopting the DCF profits approach as the default approach when valuing for mortgage lending purposes. Business owners of specialised properties should contract practitioners knowledgeable and skilled in the application of the DCF profits method.

Originality/value

This paper quantifies choice of method or model uncertainty of four different scenarios of specialised properties where both the cost approach and DCF profits methods of valuation were employed. It suggests the adoption of the DCF profits method as the default method of valuation for specialised property.

Details

Journal of Property Investment & Finance, vol. 34 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 1 March 1987

MICHAEL STJ HOPPER

The paper describes the various types of retail stores found in shopping centres and states that rental valuations are made by reference to rents paid for comparable premises. The…

Abstract

The paper describes the various types of retail stores found in shopping centres and states that rental valuations are made by reference to rents paid for comparable premises. The paper describes the alternative methods of rental valuation which may be employed. The ‘zoning’ method and the ‘overall’ method are described and commented upon with references to relevant case law and examples of each method of valuation. The alternative methods are compared and it is concluded that one or other method may be preferred in particular circumstances. It is concluded that either method may be employed but that the preferred method will be that which best facilitates comparison between rents of stores which differ in location and other relevant characteristics. The paper also deals with capital valuations on an ‘existing use’ basis and concludes that that method of valuation should be by way of capitalisation of actual rents or estimated net rental values.

Details

Journal of Valuation, vol. 5 no. 3
Type: Research Article
ISSN: 0263-7480

Article
Publication date: 29 May 2020

Gregory G. Kaufinger and Chris Neuenschwander

The purpose of the study is to evaluate whether the selection of accounting method used to value inventory increases or decreases the probability of a retail firm's ability to…

Abstract

Purpose

The purpose of the study is to evaluate whether the selection of accounting method used to value inventory increases or decreases the probability of a retail firm's ability to remain in existence.

Design/methodology/approach

This study employs a binary logistic regression model to predict group membership and the probability of failure. The study utilizes an unbalanced sample of US publicly traded failed and functioning retail firms over a ten-year period.

Findings

The results clearly support the conclusion that there is a difference in the probability of retail firm failure with respect to the accounting method used to value inventory. Merchants using a cost-based valuation method were 2.3 times more likely to fail than firms using a price-based method. The results also affirm existing bankruptcy literature by finding that profitability, liquidity, leverage, capital investment and cash flow are factors in retail failures.

Practical implications

The results suggest that traditional merchants cannot simply blame e-commerce or shifts in demographics for the retail Apocalypse; good management and proper valuation of stock still matter.

Originality/value

This study is the first to look at firm failure in the retail sector after the great recession of 2008, in an era known as the “retail Apocalypse.” In addition, this study differs from other firm failure literature by incorporating cost- and price-based inventory valuation methods as a variable in firm failure.

Details

American Journal of Business, vol. 35 no. 2
Type: Research Article
ISSN: 1935-5181

Keywords

Article
Publication date: 22 December 2020

Laura Gabrielli and Nick French

Valuation is the process of determining Market Value. Property valuation, as with the valuation of all assets, is an estimation of price in the market. It is value in exchange…

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Abstract

Purpose

Valuation is the process of determining Market Value. Property valuation, as with the valuation of all assets, is an estimation of price in the market. It is value in exchange. The valuer role is to determine the appropriate approach, the method and use the right model to achieve this aim as best as possible. It is a combination of analysing the market and determining the critical variables for the valuation method/model. The method is separate from the valuation process which should be followed (according to the International Valuation Standards Council Valuation Standards) regardless the valuation method chosen. There are valuation approaches, valuation methods and, as a subset of the methods, techniques or models.

Design/methodology/approach

This practice briefing is an overview of the Valuation Methods and Models available to the valuer and comments on the appropriateness of valuation each in assessing Market Value for specific property types.

Findings

This briefing is a review of the valuation methods and models and models that can be applied to determine market value.

Practical implications

The role of the valuer in practice is to identify the method of valuation and then apply the correct mathematical model for the valuation task in hand.

Originality/value

This provides guidance on how valuations can be presented to the client in accordance with the International Valuation Standards.

Details

Journal of Property Investment & Finance, vol. 39 no. 5
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 19 March 2018

Bernd Hoffmann and Karsten Paetzmann

This paper aims to present the rules for determining the net asset value according to the AIFM Directive which have fundamentally changed regulation of the European alternative…

Abstract

Purpose

This paper aims to present the rules for determining the net asset value according to the AIFM Directive which have fundamentally changed regulation of the European alternative funds industry. The paper discusses how these rules must be applied to ensure a reliable and objective valuation and to protect the interests of investors.

Design/methodology/approach

The paper draws upon experience gained in the market following the implementation of rules on fund valuation in the European Union in 2011 and further in Germany in 2013. The valuation rules for relevant asset classes are presented and discussed in the light of the overarching goal of investor protection.

Findings

The paper’s findings show that the market participants saw the increased requirements as an opportunity and that they have adapted to the new system. This also applies to fund valuation, even though some people criticise terminology, lack of clarity and the complexity of the new valuation scheme from a practical perspective. Also, due to the increased valuation requirements, a consolidation among market participants can be expected.

Originality/value

The issues addressed in the paper are currently the subject of debate by regulators and market participants. There are direct implications for future prudential regulation in the asset management industry.

Details

The Journal of Risk Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

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