Real estate valuation helps investors determine whether a property is worth the investment. Property valuation plays a huge role in guiding real estate buying or selling decisions.
With an accurate valuation, buyers and sellers can make informed decisions regarding real estate investments.
If you are new to real estate valuation and want to learn about the most common valuation methods used for commercial and residential real estate, then you are at the right place.
What is Real Estate Valuation?
Before we get into the types of real estate valuation, let’s go over the definition and the importance of real estate valuation.
In simple terms, real estate valuation is the process of determining the current market value of a property. It helps sellers establish a baseline for what they want to sell the property for in the market.
For real estate buyers, real estate valuation plays a huge role in helping them decide on a potential real estate investment deal.
Why is Real Estate Valuation Important?
Here are some of the reasons why real estate valuation is important:
- Helps determine the estimated market value of the property
- Helps in real estate buying and selling negotiations
- The valuation report highlights the strengths and the weaknesses of the property
- Plays an important role in the real estate investment decision-making process
Types of Real Estate Valuation Methods in Dubai
1. Cost Approach
This real estate valuation method requires the valuer to consider the cost of rebuilding the real estate structure from scratch. It includes calculating the current value of the land and the materials required to replace the existing structure.
The cost approach is recommended for unique properties with distinct structures that are difficult to find in the local real estate market. The cost approach is the best way to go if there are no comparable properties.
2. Sales Comparison Approach
A sales comparison approach is highly recommended if a residential or commercial property has comparable structures in the neighborhood. This method is also known as the market approach.
In this method, the property valuer researches the local real estate market for the recently sold properties in the area having similar features.
For example, a multiple-unit residential property having five apartments that are sold would be compared with another one that falls in the same category to determine the price of the latter.
3. Value Per Gross Rent Approach
This real estate valuation method requires you to compare the property’s potential value and divide it by the gross income generated from it to calculate the property value.
For example, if a property is valued at AED 100,000 and generates AED 50,000 in revenue, the value per gross rent multiplier for it would be:
AED 100,000 / AED 50,000 = 20 GRM (Gross Rent Multiplier)
4. Income Capitalization Approach
The income capitalization approach is based on the amount of revenue that is projected to be generated from a property. In this valuation method, the investors consider the income that can be derived from a property compared to similar properties in the market.
This valuation method is extensively used for residential and commercial properties with a leasing system set in place. Income capitalization is highly recommended for large-scale real estate investments.
5. Cost Per Rentable Square Foot
The property’s rentable square foot combines the area used by individual tenants and the square footage that constitutes the common areas used by all tenants, including stairs, parking spaces, elevators, and more.
The real estate valuation approach enables you to find the estimated value of a property by extrapolating the cost of rentable square feet and comparing it to the average lease cost per square foot to come up with a valuation for the residential property.
6. Value Per Door
The property valuation method is recommended for commercial properties. It is ideal for calculating the market value of a commercial property containing multiple apartments rather than a single-unit property.
This method enables you to determine the entire property’s cost based on its number of units. For example, if a 10-apartment building is valued at AED 1,000,000, the value per door for it would be AED 100,000. This method doesn’t consider the size of the unit.
7. Discounted Cash Flow Approach
This real estate valuation method determines the current market value of a property based on the future cash flow expected from it. This valuation method considers factors such as inflation, cost of capital, and other risks associated with the investment.
The right real estate valuation method choice depends on the property type. The recommended approach for commercial properties differs from those for single and multiple-unit residential properties.
We suggest consulting with professional property valuers who know everything about real estate studies to learn the best possible valuation method for your commercial or residential property.
If you’re in need of professional real estate valuations in Dubai, UAE, look no further than get a quote from Land Sterling. Our team of experts is dedicated to providing accurate and reliable valuations for a wide range of properties.