Property Valuation, 3rd Edition

Chapter 6Market Approach

6.1 Introduction

If properties are to be exchanged, then buyers and sellers must agree prices for the property rights they are acquiring. In a competitive market, suppliers to, users of and investors in property agree on exchange prices. These exchange prices take the form of rents and prices. Rents (periodic payments) provide evidence of the cost of occupation. Prices (capitalised sums) provide evidence of either (i) the cost of owner occupation or (ii) the cost of an investment (ownership without occupation but with receipt of rent from the occupier instead). Often, agreeing an exchange price is easier said than done due to infrequent trading and market opacity leading to information paucity. Valuations fill this information gap.

Although each property interest is unique, for the more common uses such as residential, commercial, industrial and retail space, it may be possible to group properties into relatively homogeneous market sectors defined by land use and location. This means that it should be possible to analyse exchange prices within these groups to help estimate market values. This market approach is central to valuation. The economic concept that underpins the approach is substitution, that a knowledgeable and prudent person would not pay more for a property than the cost of acquiring an equally satisfactory substitute. This implies that, within a suitable time frame, the values of properties that are close substitutes in terms of location, ...