In the valuation world, issues, and developments are rapidly growing. To maintain the quality and consistency of valuation processes, the International Valuation Standards Council (IVSC) provides a valuable service to the professional community by issuing papers regularly. 

Covering a wide range of valuation-related topics, these papers represent the voices of experts in the field. They provide in-depth analyses of contemporary issues and help valuers to better understand international standards and apply them effectively.

However, it must be emphasized that these papers are a supportive tool for the standards and not a substitute for them. Valuers are responsible for ensuring the quality of their work and adherence to the standards of the profession.

What does the term market value of a real estate property mean? 

The concept of the market value of a real estate property is a mystery to investors and decision-makers in the world of real estate trading. Is it the same price, or does it reflect a deeper value of the asset? To answer these questions, the International Valuation Standards Council (IVSC) has prepared a comprehensive research paper that explores different aspects of the concept.

Market value is the most prominent valuation tool we use to determine the value of an asset. It reflects the most likely monetary estimate of what can be received for or utilized in exchange for the asset. But it’s not as simple as that, and the price we pay may be different from the true value. Price is the amount paid for an asset. 

• Value: The opinion resulting from a valuation process compliant with international valuation standards. 
• Price: The value of an asset to the owner or potential owners in light of individual investment or operational objectives (also known as investment value).

Value is influenced by many factors and there are different bases for valuing assets. It is the job of the real estate valuer to explain this mystery to the client, explaining that market value is just one of the available bases and that other bases may be more appropriate in some cases.

The influence of the market on value

The market shapes the environment where market value forms. Market factors like supply and demand, competition, and participant entry and exit influence product or service prices.

An active market with many buyers and few sellers usually has higher prices than a market with the opposite conditions. Furthermore, government regulations, economic conditions, and technological development play a crucial role in shaping the market and thus the market value.

Market value does not just mean the current market price, but reflects the total value that can be obtained from the asset. The valuer must consider the best economic use of the asset, whether it is the current use or an alternative use. This means that the valuer must consider the future potential of the asset, not just its current value.

Market Value Framework

Although there is a clear definition of market value, the framework adds depth to the understanding and application of the concept. It defines the key criteria for determining market value, such as the characteristics of the transacting parties, the terms of the transaction, and fair value. International valuation standards help valuers apply the concept of market value accurately and confidently.

In other words, the market value framework is one of the key components of international valuation standards that provide the necessary tools for valuers to value assets by internationally accepted standards.

Market value between the past and the future

Some opinions suggest that market value is based solely on historical data. But this is not true, market value looks to the future by analyzing current data and future projections. The valuer gathers evidence from the past but uses it to build a picture of the future, thus determining the market value.

Do market swings affect market value?

Market value is not a static picture but rather reflects the dynamics of the market. However, not all swings in volatility reflect the true value of the asset. The valuer must distinguish between normal volatility, which reflects changes in supply and demand, and abnormal volatility, which reflects exceptional market conditions.

The real estate valuer’s assumptions also have an impact on the value! Hypothetical conditions are imaginary scenarios that valuers use to analyze the impact of different factors on the value of a property.

For example, a valuer may assume that the interest rate will change by a certain percentage, that the economy will experience a recession, or that there is a change in tax laws. These scenarios help the valuer understand how sensitive the value of the property is to changes in economic conditions. 

However, these hypothetical conditions must be reasonable and based on factual data. The valuer should be able to quantitatively assess the impact of these conditions on the value, if possible.

Conclusion

Market value is a broad term with many concepts that may be confused by non-specialists! The valuer should explain it and communicate it smoothly and clearly to the client, explaining all the inputs to determine the value, even if they are assumptions. Assumptions play a pivotal role in the property valuation process. They enable the valuer to build possible scenarios to determine the fair value of the real estate.

 However, these assumptions should be used with caution and scrutiny, ensuring that they are logical and consistent with valuation principles. The valuer must also recognize that these assumptions are subject to change, and that reassessment is necessary under changing circumstances.

The valuer’s skill lies in their ability to construct realistic and evidence-based scenarios, taking into account the impact of assumptions on the outcome.