Depreciated Replacement Costs (DRC) Method

Question 1

What is the purpose of the depreciated replacement cost method of valuation?

Answer 1

• Used for owner-occupied properties
• For accounts purposes for specialist properties
• For rating valuations of specialist properties

Question 2

What are the TWO steps of the depreciated replacement cost method of valuation?

Answer 2

1. Value land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration

Question 3

How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?

Answer 3

1. Physical obsolescence - result of deterioration / wear and tear over the years
2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
3. Economic obsolescence - due to changing market conditions for the use of the asset

Question 4

Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?

Answer 4

• Not suitable to be used for valuations for secured lending purposes
• Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements

Question 5

When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?

Answer 5

• If higher, the valuer must state the Market Value for any readily identifiable alternative use
• If appropriate, they must state that the Market Value must be materially lower on cessation of the business

Question 6

What guidance has the RICS produced on the depreciated replacement cost method of valuation?

Answer 6

RICS Depreciated replacement cost method of valuation for financial reporting, 2018

Question 7

What part of the Red Book relates to DRC?

Answer 7

UK VPGA 1 Valuation for financial reporting: general matters
UK VPGA 1.5 Valuations based on depreciated
replacement cost
UK VPGA 4 Valuation of local authority assets for accounting purposes

Question 8

When would you use the depreciated replacement cost method of valuation?

Answer 8

• Not a basis of value but a valuation method
• May be used where direct market evidence is limited or unavailable for specialised properties
• E.g. lighthouse, school
• Can be used for accounts purposes
• Or for ratings valuations