The three internationally defined valuation approaches are the market approach, the income approach and the cost approach. These valuation approaches are easily identified from their basic principles.
- The market approach equates to the comparison method of valuation.
- The income approach generally refers to the investment method – either traditional (cap rate) or discounted cash flow (DCF) – or can refer to the profits method.
- The cost approach is often taken to refer to the depreciated cost method of valuation. Though this may, depending upon circumstances, be applied to use of the residual method for valuing properties with development potential, it is more often known as a mixed approach.
It should be stressed that the three approaches and are not mutually exclusive, for example:
- parts of a property being valued may require the use of different approaches (e.g. part of a property may be let as an investment whilst another may be a potential site for redevelopment)
- it is increasingly a requirement that more than one approach or method should be used and the results considered before reporting a value.
This section is maintained by Anthony Banfield.
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RICS standards: RICS Valuation – Global Standards
RICS standards: Discounted cash flow valuations
RICS standards: Comparable evidence in property valuation
RICS journal article: Valuation and new real estate business models
RICS journal article: Guidance on DCF for valuation of investment property updated