Definition of property market value

Property valuations around the world used to be based on different definitions but the global property valuation profession has come together in recent years to formulate a standard set of definitions.  The most frequently used definition of value is market value.  It is defined in both global and UK property valuation standards as:

“The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.” [1]

This valuation basis represents the current exchange value of the property if placed on a similar market as exists today but was placed on that market long enough ago to be properly marketed and the best price obtained as at the valuation date.  In an attempt to get a current market price for an asset that takes time to transact, the definition has to be somewhat contrived.  As it is an exchange value it has no shelf life but sometimes users of valuations presume that it does.  Sometimes commentators use words such as forced sale value when actually what they are describing is the situation where banks sell off foreclosed properties quickly.  The sale is not “forced” but is actually also a market value, but with the special assumption that it has a restricted marketing period which can lead to a lower realisation price.

Example

This basis of value is most commonly used to value commercial property for secured bank lending purposes in both international and UK markets.  Despite this, the recent (2011) Independent Commission on Banking has virtually ignored the role market valuation played in bank lending in the period leading up to the financial crisis.  There are alternative definitions that would have indentified the over-pricing in commercial property markets and reduced the level of exposure to the subsequent property market crash, if applied and used properly. [2]

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