(In accordance with RICS Red Book 2025 / IVS)
1. INTRODUCTION
The market approach is one of the three principal valuation approaches recognised under VPS 3 – Valuation approaches and methods in the RICS Valuation – Global Standards (Red Book 2025).
It is widely regarded as the most direct and market-reflective method, as it derives value by reference to actual transactions of comparable assets.
The approach is grounded in the economic principle of substitution, which assumes that a prudent buyer will not pay more for an asset than the cost of acquiring an equivalent substitute in the market.
2. DEFINITION
An approach that provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available.
3. CORE PRINCIPLES
- Substitution: Value is based on comparable alternatives.
- Market Evidence: Uses sales, listings, and rental data.
- Comparability: Depends on similarity (location, size, legal, economic).
4. METHODOLOGY
4.1 Comparable Selection
- Recent transactions
- Arm’s length deals
- Relevant to subject asset
4.2 Adjustments
- Time (market changes)
- Location
- Size & layout
- Condition
- Legal factors
4.3 Value Derivation
Value is derived using:
- Unit rate (e.g., price per sq.ft)
- Direct comparison value
5. COMPLIANCE (RED BOOK)
- VPS 3: Select appropriate valuation method.
- VPS 2: Used for market value and rent.
- VPS 4: Requires proper data verification.
- PS 2: Requires professional judgment.
6. ADVANTAGES
- Reflects real market behavior
- Based on actual data
- Widely accepted
- Reliable in active markets
7. LIMITATIONS
- Lack of data in inactive markets
- Difficult for unique properties
- May rely on outdated transactions
- Market fluctuations affect accuracy
8. APPLICATIONS
Suitable for:
- Residential properties
- Commercial real estate
- Land valuation
- Frequently traded assets
Less suitable for:
- Specialised properties
- Assets without market data
9. MULTI-APPROACH ROLE
- Primary or supporting method
- Used to validate income/cost approaches
10. CONCLUSION
The market approach is a key valuation method providing transparent and evidence-based results. Its effectiveness depends on the quality of comparable data and the valuer’s judgment. When applied correctly, it delivers reliable and market-aligned valuations.