A leisurely guide to valuing

There are a number of circumstances where surveyors and valuers are required to base their valuations and assessments on current construction costs. These include:

• Depreciated Replacement Cost (DRC) valuations

• Development appraisals

• Residual site valuations

• Contractor's basis of valuation for rating

• Effective Replacement Costs (ERC)

• Insurance rebuilding cost assessments

The level of detail required for the estimate of building costs will depend on the design of the individual property, the type of property and the stage at which the calculation is being carried out. However, in many cases a unit rate (£/m2 of floor area) approach is appropriate.

Depreciated Replacement Cost

Depreciated Replacement Cost is defined in Practice Statement 4 in the Red Book as a method of using "net current replacement costs to arrive at the value to the undertaking in occupation of the property as existing at the evaluation date, where it is not practicable to ascertain Existing Use Value". It is therefore appropriate for valuing specialised properties. RICS Books' Isurv states that "the valuer should value the building by considering a hypothetical transaction which would provide the buildings which are to be valued in their entirety. It may be appropriate to assume a modern substitute with equivalent service capacity which has a smaller floor area than the actual building in cases where, because of technological changes or for other reasons, the undertaking could be carried on with equal effectiveness in a smaller modern building."

The practice statement points out that the valuer must use his or her judgement in providing advice in respect of replacement costs between a "simple modern alternative and a replacement of the existing but somewhat obsolete structures. In providing cost advice, surveyors may look at groups of buildings of a similar age or type of construction".

Development appraisal

In making an investment in new property there needs to be a development appraisal of the likely financial performance of the project. This will require an estimate of the construction cost, invariably before the preparation of any design work. In these circumstances cost can be used on unit £/m2 costs.

Residual site valuation

A residual site valuation allows a developer to calculate the value of land by deducting all other costs, including the developer's profit, from the market value of the finished development or the current value of its future income stream. Again, this calculation is often done before any detailed design has been carried out and therefore the use of £/m2 costs is appropriate.

Contractor's basis of valuation

The contractor's basis of valuation for rating purposes should be applied in the case of properties which are not normally let and which, by their nature, do not lend themselves to valuation by comparison with other classes of property where rental evidence does exist. The starting point for a valuation on a contractor's basis is the effective replacement cost (ERC). The Joint Professional Institutions' Rating Forum's guidance defines ERC as an estimate of what it would cost "to construct the property, including all the building's site works and all rateable plant and machinery within the property on an undeveloped site". The guidance states that in estimating the replacement cost "the Rating Forum considers that unit costs should be the primary method adopted in order to achieve consistency of approach".

Reinstatement cost assessment

The RICS guidance note on reinstatement cost assessment states that the reinstatement basis of insurance requires an assessment to be made of:

• The actual cost of rebuilding the whole of the building itself in its present design and materials

• Any tenants' improvements which have become landlords' fittings

• Modification to the design and specification, to comply with current building regulations, statutory requirements

• The whole cost of the rest of the property, including all external works and services such as drainage manholes, water supply ducts, electricity supply and so on.

The guidance notes also states that the generally accepted method currently in use for the calculation of the reinstatement cost is "to apply unit rates to the superficial area of a building, subsequently adjusting to suit the particular circumstances of the property and the insured".

Joe Martin is director at RICS research arm the BCIS,

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