What are Bases of Value?

Valuation is the process of forming an opinion on what an asset or liability might be worth, at a certain time, under a certain set of assumptions.

These assumptions act like framework around which the opinion of value is formed, as well as dictating what inputs and data are needed. As valuation practice has developed, a set of pre-defined assumptions has been formalised to encourage transparency and consistency in valuation. These sets of assumptions are known as ‘bases of value’.

Most bases of value make explicit or implicit assumptions about the entities or parties taking part in a transaction, typically along the lines of:

• Whether the parties are hypothetical or existent in reality,
• If they are identifiable specific parties,
• If they can be categorised within a predefined or described set of potential participants,
• The potential conditions or motivations that might drive these parties at the assumed date, for instance, being under duress,
• And the level of knowledge they are presumed to have.

Common Bases of Value

Market Value

‘Market value is 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’. ((International Valuation Standards))

Market value is a widely recognised basis of value that estimates the potential selling price of an asset, predicated on the premise of a free exchange between informed and unpressured parties. The computation of this value assumes the asset’s highest-and-best use.

Market valuations should ignore any distortions that may arise from unique attributes which might be significant only to a particular purchaser. The overarching aim is to find a price that remains consistent across varied scenarios. However, prospective developments or synergies expected by most market participants do factor into a market basis.

Market Rent

‘Market rent is the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’ ((International Valuation Standards))

Market rent depends on the lease’s details. Normally, the lease reflects what is common in the local market. Sometimes, unique terms might be needed. Key factors include how long the lease lasts, how often rent changes, and who handles maintenance costs. In certain locations, laws can limit or affect lease terms, so these must be considered.

Typically, market rent suggests what a vacant property can be rented for, or the rent for a property once the current lease ends. However, it is not appropriate for rent reviews. In these circumstances, the lease’s own terms should be used.

Valuers need to be clear about the main lease terms when giving a view on market rent. If incentives are common in the market and affect rent levels, they should be included in the market rent value. The valuer must specify any assumed incentives and lease details.

Investment Value

‘Investment value is the value of an asset to a particular owner or prospective owner for individual investment or operational objectives.’ ((International Valuation Standards))

Investment value assumes the view of a specific entity or owner, based on the benefits they derive from holding a particular asset, rather than its potential sale price in the market. This method does not use the notion of an actual exchange or sale, focusing instead on the asset’s intrinsic worth to its holder.

It factors in the entity’s financial goals, operational needs, and strategic plans. For example, a piece of land might have a certain market value based on its size and location, but its investment value to a company might be higher if they plan to use it for a project that’s core to their business strategy.

Investment value can be utilised to gauge investment performance over time. By examining how the investment value of an asset or a portfolio changes, investors can find whether their strategic decisions align with their financial goals.

Synergistic Value (Marriage Value)

‘Synergistic value is the result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values.’ ((International Valuation Standards))

Synergistic value arises when the combination of two or more interests leads to a value greater than their individual values when considered separately. If the benefits of combining assets are exclusive to a single buyer, then this value can differ significantly from the assets’ market values.

The term “marriage value” is often used to describe this extra value derived from the combination of assets.