Price and value: is it worth the hassle?

Citation

French, N. (1998), "Price and value: is it worth the hassle?", Journal of Property Valuation and Investment, Vol. 16 No. 4. https://doi.org/10.1108/jpvi.1998.11216daa.001

Price and value: is it worth the hassle?

Price and value: is it worth the hassle?

Over the last couple of years there has been substantial debate within the valuation profession about the new RICS information papers on Calculation of Worth (RICS, 1997a) and Commercial Investment Property ­ Valuation Methods (RICS, 1997b). These papers relate to issues raised in the Mallinson report (RICS, 1994) which highlighted that clients of valuation services were often confused by the figures that were provided. The confusion arose because many clients (including funds and banks) erroneously believed that the valuation figures provided by the valuer conveyed a degree of security; an inherent worth. They did not understand that a valuation simply provides a snapshot estimate of exchange price on that day.

The definitions of price, worth and value as contained in the information papers are as follows:

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  Price is the actual observable exchange price in the open market.

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  Value is an estimate of the price that would be achieved if the property were to be sold in the market.

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  Worth is a specific investor's perception of the capital sum which he/she would be prepared to pay (or accept) for the stream of benefits which he/she expects to be produced by the investment.

These concepts are not new and the terms ascribed to each were determined by consultation with representatives of all client types. "Price" is accepted by all as the actual financial consideration at the point of exchange. "Value" is a proxy for the same either in advance, or in lieu, of the actual sale. Clients do not have a problem with this distinction. "Worth" is a subjective figure from the viewpoint of the client. A calculation of worth, therefore, determines very simply, if the client would be willing to buy or sell at any given price in the market. As a vendor, if the price is above their calculation of worth, they will sell while, all other things being equal, if the price is below worth they will choose to retain the asset.

These concepts are in keeping with economic theory. In economic terms, "value" is equivalent to "value in exchange", "worth" is "value in use". These nuances are discussed in full in both information papers (RICS, 1997a; 1997b). The RICS is not introducing new concepts, it is simply clarifying what services can be offered to the client.

The principal message being proffered by the RICS is:

To avoid confusion, greater care should be taken over the use of the words price, value and worth. In the context of real estate, value should always be related to price (Value in Exchange) not worth (Value in Use). Price/value are market driven whereas worth is subjective and based on the particular requirements/circumstances of the individual.

Many would argue that providing calculations of worth is not the role of the valuation profession. Personally I believe that valuation is just one part of a much larger whole (witness the definition of appraisal in the Red Book (RICS, 1996)). To simply provide a valuation figure without placing that figure into some economic context is abdicating professional responsibility. Isn't a client asking the question "But is it worth me buying it at that price?" what property advice is all about?

Nick FrenchAcacia Lecturer in Land ManagementThe University of Reading

The views expressed are personal and do not necessarily reflect the views of the RICS.