Property Valuation, 3rd Edition

Chapter 8Cost Approach

8.1 Introduction

The comparison and income approaches to estimating market value are predicated on the availability of market price information. For certain types of land and property, market trading is sparse or non‐existent. If there is no existing market for the tenure rights, then it may be possible to ‘create’ one using an auction or tender process. This approach may be appropriate in the case of large‐scale land acquisitions or the sale of unusual rights such as airwaves for mobile phone networks. If this is not possible, then a cost approach may be appropriate. Two cost approach methods are described in this chapter: the replacement cost method and the residual method.

The replacement cost method is used to value properties that rarely, if ever, trade on the open market and therefore there is little or no evidence of comparable market prices on which to base value estimates. Some properties are very use‐specific: bespoke manufacturing plants such as chemical works and oil refineries; public administration facilities such as prisons, schools and colleges, hospitals, town halls, art galleries and court facilities; and transport infrastructure such as airports and railway buildings. The method is used to value properties for financial reporting, taxation, and expropriation purposes. It is also used to estimate building reinstatement costs for insurance purposes. It is important to note that, when these sorts of properties are offered for sale, perhaps ...