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Chart showing the sales comparison, cost, and income approaches to property valuation in Australia.

Property Valuation Methods Used in Australia

Professional property valuers in Australia rely on accepted valuation approaches to determine the market value of real estate assets. The main methods used are the sales comparison, cost, and income approaches. This article provides an overview of each valuation methodology and how they are applied by valuers in the Australian property market.

The Sales Comparison Approach

The sales comparison approach, also known as the market approach, is the most commonly used method by property valuers in Australia. This approach analyses recent sales of comparable properties to estimate the market value of the subject property.

Key steps in the sales comparison approach include:

  • Identifying similar properties sold recently in the same area as the subject property. These are known as ‘comps’.
  • Analysing the key features of the comp properties, such as location, size, age, condition etc.
  • Making adjustments to the sales prices of comps to account for any differences compared to the subject property.
  • Applying the adjusted sales prices of comps to determine an indicated value range for the subject property.
  • Reconciling the adjusted values into a final opinion of market value.

The availability of detailed sales data through sources like state government records and real estate websites assists valuers in applying the sales comparison method accurately in Australia.

Advantages of the Sales Comparison Approach

  • Relies on actual sales data reflecting what buyers have recently paid for similar properties. This provides real market evidence for valuations.
  • Is familiar to and accepted by investors, lenders, courts and property professionals in Australia.
  • Can be applied to different property types including residential, commercial, rural and industrial real estate.

The Cost Approach

Australian property valuers also use the cost approach where appropriate. This method values a property based on the cost to recreate or replace it.

The key steps include:

  • Estimating the land value through recent sales of comparable sites.
  • Determining replacement costs for the buildings and other improvements based on current construction rates.
  • Accounting for depreciation of the improvements based on their age and condition.
  • Combining the land value and depreciated building cost to derive the property’s total value.

The cost approach is most applicable for newer properties or specialised assets where there is a lack of comparable sales data.

When the Cost Approach is Used

  • Valuing new or proposed construction properties.
  • As a secondary method to support the sales comparison approach.
  • For special use properties like schools, churches, hospitals etc.
  • Where there have been no recent comparable sales.

The Income Approach

For income-producing properties like commercial real estate, property valuers often use the income approach. This values a property based on its earning potential.

Key steps in the income approach involve:

  • Estimating the property’s potential gross income based on current market rates for rent.
  • Calculating effective gross income by allowing for vacancy rates and rent concessions.
  • Determining net operating income by deducting operating expenses from the effective gross income.
  • Applying a capitalisation rate to the net income to derive a property value.

The income approach allows valuers to account for a property’s ability to generate future rental income flows for investors.

Applicability of the Income Approach

This method applies to property types including:

  • Commercial office buildings.
  • Retail shopping centres.
  • Industrial warehouses.
  • Residential rental apartment blocks.
  • Hotels, motels and other hospitality assets.

By utilising a combination of accepted valuation methods, professional property valuers in Australia can estimate market values that property owners, buyers, investors and lenders can rely on for sound decision-making.