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Market value and depreciated replacement cost: contradictory or complementary?

Author

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  • Nick French
  • Laura Gabrielli

Abstract

Purpose - In January 2005, the International Valuation Standards Committee (IVSC) published the International Valuation Guidance Note No. 8 entitledThe 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 Reportingand 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.

Suggested Citation

  • Nick French & Laura Gabrielli, 2007. "Market value and depreciated replacement cost: contradictory or complementary?," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 25(5), pages 515-524, August.
    • Handle: RePEc:eme:jpifpp:v:25:y:2007:i:5:p:515-524
    DOI: 10.1108/14635780710776693
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    Citations

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    Cited by:

    1. Marta Dell’Ovo & Francesca Torrieri & Alessandra Oppio & Stefano Capolongo & Marco Gola & Andrea Brambilla, 2023. "The Enhancement of Special-Use Real Estate Properties: The Case of Hospital Facilities," Land, MDPI, vol. 12(8), pages 1-23, August.
    2. Aihie Vincent Uwaifiokun & Ikuabe Matthew, 2018. "Evaluation of Cost Estimation Techniques in Drc Valuation: A Comparative Assessment of Valuers and Quantity Surveyors in Lagos State," Baltic Journal of Real Estate Economics and Construction Management, Sciendo, vol. 6(1), pages 175-192, November.
    3. Copiello Sergio & Bonifaci Pietro, 2018. "Depreciated Replacement Cost: Improving the Method Through a Variant Based on three Cornerstones," Real Estate Management and Valuation, Sciendo, vol. 26(2), pages 33-47, June.
    4. Enrico Fattinnanzi & Giovanna Acampa & Fabrizio Battisti & Orazio Campo & Fabiana Forte, 2020. "Applying the Depreciated Replacement Cost Method When Assessing the Market Value of Public Property Lacking Comparables and Income Data," Sustainability, MDPI, vol. 12(21), pages 1-22, October.

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