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Cost Method

Cost Method. Replacement Cost Method. Used to value specialised properties that are seldom sold Manufacturing: Chemical works Oil refineries Public administration Schools and colleges Town halls, courts and prisons Hospitals, art galleries Infrastructure Airports Railway buildings

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Cost Method

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  1. Cost Method

  2. Replacement Cost Method • Used to value specialised properties that are seldom sold • Manufacturing: • Chemical works • Oil refineries • Public administration • Schools and colleges • Town halls, courts and prisons • Hospitals, art galleries • Infrastructure • Airports • Railway buildings • Valuations required for • company accounts • business rates • insurance (known as reinstatement valuations)

  3. Replacement Cost Method • Assumes that the value of existing property = the cost of providing an alternative similar property • Must allow for depreciation (due to age and obsolescence) • Method calculates replacement cost rather than market value • Method: • Cost of new building • Less allowance for depreciation • Plus value of land (not included if valuation is for insurance purposes) • Equals value of property • Several methods of calculating depreciation allowance • Straight line • Reducing balance • Sinking fund

  4. Replacement Cost Method:Valuation for accounts A purpose-built industrial property with an estimated life of 90 years with 16 years remaining has a GIA of 2,500 m2 and a site area of 0.8 hectares. The current value of this property needs to be estimated for inclusion in the company accounts. [1] Figure obtained from comparable evidence of land sales [2] An overall figure or prices of component parts may be used

  5. Replacement Cost Method:Valuation for insurance Also known as reinstatement valuations, provides for a similar property as at the date of the valuation or at the commencement of insurance policy cover, should be carried out at least every three years [1] Building costs can be broken down into component parts and based on a Quantity Surveyor’s bill of quantities [2] Building area can also be broken down [3] Obsolescence may affect different parts of building at different rates [4] Depreciation also can vary according to type of structure

  6. Replacement Cost Method:Valuation for rating • Method produces a capital value which must be ‘de-capitalised’ at an appropriate yield (usually between 3 – 6%) to find a rental value • Example valuation of an old hospital building… Current cost of erecting a modern equivalent) £ 250 m Less: Allowance for age and obsolescence of Existing building (as a % age) say 60% - £ 150 m Add: value of site on which building stands + £ 3.5 m Effective Capital Value (ECV) of existing building £103.5m Converted to annual (rental) equivalent multiply by say 6% £6.21 m

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