Depreciated Replacement Cost (DRC) Flashcards
What is the DRC Depreciated Replacement Cost method of valuation?
It is used where there is no active market for the asset being valued - that is, where there is no useful or relevant evidence of recent sales transactions due to the specialised nature of the asset
For more information on the Depreciated Replacement Cost method of valuation?
Members should refer to the RICS UK Guidance Note Depreciated Replacement Cost method of valuation for financial reporting , 1st edition
What is the definition of Depreciated Replacement Cost?
The current cost of replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation
When is the depreciated replacement cost valuation method used?
It is used to value specialised properties:
Specialised property is defined as:
A property that is rarely, if ever sold in the market, except through a sale of the business or entity of which it is part, due to the uniqueness arising from its specialised nature and design, its configuration, size, location or otherwise.
Common examples are chemical works, steel plants, hospitals etc
What is existing use value? (EUV)
Existing use value. … The term ‘existing use value’ (EUV) refers to what land is worth in its current form. In other words, the price land or property can be sold for on the open market with the assumption that it will only be used for the existing use for the foreseeable future
The value would be in the basis of Market Value
The term ‘market value’ refers to the price that property or land can actually be sold for on the open market.
Generally there is minimal or no difference between the EUV and market value of property or land, however, there are some instances where there will be a difference. For example, there may be an expectation that it will be possible to get planning permission to develop the land, or that it may be possible to change the use of property. This will give it a higher value, known as ‘hope value’.
This can prove problematic when valuations are carried out, and generally the valuer will provide an opinion on both valuations and explain the reasons for the difference in their valuation report.
When is the DRC method unsuitable?
For secured lending purposes as the method is usually used for property that is changing hands however it may provide a useful cross check
More info under?
Contractors method cards as this falls under
What valuation approach does the DRC method fall under?
. The Cost Approach
What Guidance is available relating to the Depreciated Replacement Cost DRC Approach?
The UKGN 2 (uk Guidance Note)
When shouldn’t the DRC method be used?
Where there is a clearly identifiable flow of income and so it might be best valued using the market or income approach
What three points does the DRC method include?
- Assessment of the replacement cost, usually of a modern equivalent asset
- The site value
- Assessing depreciation
What are the three types of depreciation?
. Physical deterioration
. Functional obsolescence
. Economic obsolescence
These can overlap
How is depreciation calculated?
Firstly the age needs to be established as well as the estimate of remaining useful life. Add them together giving the the total life of the building. Then calculate the depreciation which is 100/total life
What other approach can be considered to work out the depreciation?
The s curve
What else should the valuer need to know?
Detailed knowledge of the asset, it’s function and environment and be very knowledgeable about the asset, how it works, how it’s built and how it wears out
