Valuation of Real Estate Assets – Land Plus Depreciated Replacement Cost

On occasions when there is no comparable evidence available or an asset is one that would not normally trade in the open market, valuers have to assess the market value of the land and then add it to the Depreciated Replacement Cost (DRC) of the asset. This approach does not represent the true market value as per the RICS Valuation – Global Standards which defines Market Value as:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion.”

Historically, an economic life expectancy for buildings in the UAE of circa 50 years has been adopted and the current build costs depreciated accordingly. In order to assess the DRC correctly, different elements of the building need to be depreciated at different rates, for example, MEP installations, which typically have an economic life of 20 years.

The potential conundrum now is that where firms are being asked to value for secured lending purposes for a 25-year mortgage on older stock, say 35 years plus, they cannot technically advise the lender that the asset is suitable for loan purposes because in theory, at least, there is only 15 years’ unexpired economic life remaining. One potential solution might be for the lender to offer a shorter-term loan although this is unlikely to be well met by borrowers and those seeking to re-gear loans against both commercial and residential assets who typically seek the longest term possible.

This issue is complex and possibly the only way of extending the economic life expectancy of buildings in practice and for valuation purposes, is to establish whether they have been maintained properly, if there has been an asset register used to record maintenance and asset replacements, if there have been any life cycle cost studies to support the planned maintenance regime and if there have been any condition assessments/surveys undertaken that could be referred to. Any of this information could help support an extension of the original 50-year economic life expectancy.

As stock across the Emirates matures over the coming years, this is likely to be a recurrent issue faced by valuers and lenders alike and requires a consensus of opinion to be reached across the industry on how to approach the valuation of buildings approaching the end of their perceived economic life.