Valuation is a crucial process within the real estate industry and understanding the distinctions between different definitions of “value” is key to accurate and effective assessments. While “market value” is one of the most referenced terms, other value definitions like “investment value,” “fair value,” and “insurable value” each have unique characteristics, purposes, and applications. Below, we will explore these distinctions in both definition and application to illustrate the nuances of each.
Market Value
Market Value is the king of all values and the reference point across the different definitions of “values”. This is why you will always see it capital letters or shortened as MV.
According to the Royal Institution of Chartered Surveyors (RICS) Valuation – Global Standards (which is the authority in this field), Market Value is “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
Market Value is the most widely used definition and is often the baseline for many valuations. It is generally sought in situations where a property is being bought or sold on the open market (meaning that many potential investors had proper access to information and enough time to study this opportunity). Market value reflects what a typical buyer would be willing to pay under general current market conditions, with no special considerations influencing the sale. This value type is instrumental in determining transaction prices, and establishing investment baselines.
RICS also states that hotels are “trade-related properties” and therefore their market value needs to be determined by a Discount Cash Flow (DCF) methodology. What does this mean? The Market Value of your hotel is the value of the potential profits it will generate in the future.
Investment Value
Investment value (also known as “worth”) is the specific value of a property to a particular investor, given their own investment criteria and financial objectives. This value is influenced by the investor’s individual requirements, such as target yield, risk tolerance, and investment horizon.
Investment value is most relevant for corporate or institutional investors who assess properties based on their unique business strategies or goals. For example, an investor looking to maximize cash flow may value a property differently than one focused on long-term capital appreciation. Investment value often differs from market value as it is influenced by the specific needs and resources of the individual investor, rather than the open market. It has happened in my life that a Paris hotel I recently valued was shortly after sold at a 30% higher price. Truth has it that the buyer was the owner of the hotel located adjacent to the one for sale. This was a classic example of “marriage value”. In this case, the purchaser was benefitting form many synergies (clustering of team, etc.) which would have not been available to any other purchaser.
Fair Value
Fair value, as defined by the International Financial Reporting Standards (IFRS), is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Unlike market value, fair value accounts for market participants who may hold specific insights or motivations.
Fair value is used primarily in financial reporting, especially for balance sheet valuations where assets need to reflect values that are fair across all stakeholders. This value often surfaces in mergers, acquisitions, and business valuations, where different parties have distinct knowledge and interests, which may slightly bias the valuation from pure investment market perspectives.
Insurable Value
Insurable value is the amount that a property can be insured for, excluding the land component. It generally considers the cost of replacing or reconstructing the property to its current standards, without accounting for market value fluctuations.
Insurable value is essential for determining adequate insurance coverage. Unlike market or fair value, insurable value does not fluctuate with market trends. Instead, it focuses on the cost to rebuild or repair in the event of damage. It is critical for insurance policies to prevent underinsurance and ensure that property owners can restore their property after loss. This “Value” is not used for open market transactions but for calculating insurance policy premiums.
Liquidation Value
Liquidation value represents the amount that can be realized if the asset is sold under constrained or forced sale conditions, typically within a short time frame and often at a discount to the Market Value. Liquidation value is commonly used in insolvency situations or where a quick sale is necessary, such as in foreclosure or liquidation. It helps creditors and stakeholders understand the minimum value that can be obtained and is often lower than Market Value due to the urgency and potential lack of full marketing exposure.
Key Differences in Definition and Application
While market value is based on a balanced, typical transaction, other values like investment value or fair value incorporate more specific criteria, such as individual motivations or particular market participant perspectives.
Market value is the go-to for most open-market transactions, whereas values like insurable and liquidation value serve niche purposes (e.g., insurance and distressed sales). The context of the valuation (e.g., for financing, financial reporting, or insurance) often dictates which value type is most relevant.
Conclusion
For any valuation professional, understanding the nuances among these values is essential for providing accurate assessments that meet client needs. Whether determining market value for an acquisition or assessing insurable value for a policy, each value type has a distinct role and serves to address specific scenarios. By applying the correct definition in each context, valuers ensure that their clients receive the most relevant and reliable valuation.
Giuliano Gasparini
HOSPITALITY ASSET MANAGERS ASSOCIATION MEA
Hospitality Asset Managers Association (HAMA) MEA
