Depreciated Replacement Cost (DRC) Methood of Valuation

Question 1

What is the DRC method also known as?

Answer 1

Contractors method

Question 2

When should DRC be used?

Answer 2

Should only be used where direct market evidence is limited or unavailable for specialised properties

Question 3

What are specialised properties?

Answer 3

Sewage works, lighthouses, oil refineries, docks, schools, a submarine base

Question 4

What is the purpose of DRC?

Answer 4

Used for owner occupied properties

For accounts purposes for specialised properties

Also used for rating valuations of specialist properties

Question 5

Methodology for DRC?

Answer 5

1. Value of land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence / deterioration (Use BCIS and then judge level of obsolescence)

Question 6

Estimating the amount of depreciation appropriate:

Answer 6

Physical obsolescence - result of deterioration/wear and tear over the years

Functional obsolescence - design or specification of the asset no longer fulfills the function for what it was originally designed

Economic obsolescence - Due to changing market conditions for the use of the asset

Question 7

Red Book Global Compliance:

Answer 7

• This method of valuation is not suitable to be used for Red Book Global compliant valuations for secured lending purposes
• It can be used for the calculation of MV for specialised properties only for valuations for financial statements
• A DRC valuation undertaken in the private sector should be accompanied by a statement that it is subject to adequate profitability of the business, paying due regards to the value of the total assets employed
• A DRC valuation undertaken in the public sector should be accompanied by a statement that is it subject to the prospect and viability of the continued occupation and use
• When reporting a DRC valuation - the valuer must state the MV for any readily identifiable alternative use, if higher or if app a statement that the MV on cessation of the business would be materially lower

Question 8

What is the RICS guidance?

Answer 8

RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for Financial Report 2018

This provides a range of advice on this method of valuation