PM
19,4
298
Property Management,
Vol. 19 No. 4, 2001, pp. 298-307.
# MCB University Press, 0263-7472
Received November 2000
Revised May 2001
The valuation of the site in
depreciated replacement cost
and contractors basis
valuations
Anthony Andrew and Michael Pitt
Heriot-Watt University, Edinburgh, UK
Keywords Depreciated replacement cost, Valuation, Contractors method, Site value rating,
Public sector accounting, Capital value
Abstract Examines a practical problem that arises in the Depreciated Replacement Cost (DRC)
valuation of specialised property assets, particularly those owned by Central Government and the
National Health Service which are subject to capital charging. The DRC approach values the site
on a market basis and the building on a cost basis, adjusted for obsolescence, and aggregates the
two elements. The literature and most practitioners having tended to focus on the problems of the
cost elements, aims to look more closely at the problems relating to the site valuation. Different
approaches significantly affect the value and can also react perversely with other strands of
Government policy. While the main focus here is on Central Government property assets, these
throw into sharp focus issues which are of wider interest.
Introduction
The capital charging system has operated in Central Government since 1998-
1999 when it replaced the Property Repayment System (PRS) operated by the
Government estate managers, Property Holdings. In the health sector, this
occurred earlier. ``A fundamental change took place from 1 April 1991, in that
capital isno longer a free good in the NHS'', (Heald and Scott, 1995). Central
Government organisations pay an annual capital charge based on 6 per cent of
the Existing Use Value (EUV) of the asset assessed in accordance with the RICS
(1995) Appraisal and Valuation Manual (The Red Book) and depreciation on the
buildings. This reflects the value of the assets to the continuing enterprise of
the assets and prevents them being treated as free goods. The aim is to send
property managers clear economic signals of the real cost of holding assets to
enable them to manage their resources efficiently (HM Treasury, 1996) in the
absence of a market. Leasehold assets are excluded as the rent paid indicates
their opportunity cost.
Where there is no open market, an EUV approach is impossible in the
absence of transactions evidence, so the valuer uses a cost-base approach as a
surrogate, ``to arrive at a market related value'' (IVSC, 2000). The valuer
estimates the EUV of the site on a comparative basis. This can assume the
existing use prevailing on the site, or assume planning permission for
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Anthony Andrew is Head of Land and Property at the Scottish Executive. The views expressed
are his own and not necessarily those of the Executive.