Direct Comparison Approach (Part 3)

 

In this section, we will learn about the Direct Comparison Approach.

 

 

Direct Comparison Approach

 

Direct Comparison Approach, also known as the Market Approach, provides an indicative value of a property or asset by comparing it with similar comparable assets. The market approach primarily used to arrive at the land value of the property.

 

The following are two major circumstances where the market approach should apply.

 

1. A similar asset has been sold or transacted in the same market.
2. A similar asset is actively available for trade in the same market.

 

Further, in a market approach, the value of the property will be estimated after taking into consideration the premium or discount for various factors, including Location, Size of the property, profile of the surrounding area, frontage/visibility, development potential, shape of the property, zoning/approvals, transaction premium, special consideration, etc.

Where:

 

Size of the property

Smaller land parcels command a premium compared to larger land parcels, as larger land parcels require more time for marketing vis-à-vis smaller land parcels

 

Profile of surroundings

 

If the property is located in an established market with a superior development profile and infrastructure, it would command a premium as compared to properties with an inferior development profile and infrastructure

 

Frontage/Visibility

 

If the property is accessible via main roads with significant frontage, it would command a premium compared to property that is accessible through narrow roads or internal roads

 

Development Potential

 

Properties with a higher achievable FSI or FAR would command a premium compared to properties with a lower FSI or FAR. FAR or FSI determines the permissible built-up area on a specific land

 

Shape of the Property

 

Land parcels that are regular in shape would command a premium over irregularly shaped land parcels

 

Zoning / Approvals

 

Land parcels that are approved to construct commercial, residential, or mixed development would command a premium over agricultural lands

 

Transaction Premium

 

Considering the time value of money and the timeline of the transaction, properties that are transacted prior to the valuation date would command a premium

 

Special Consideration

 

Land parcels that are free from any development restrictions (like the HT Line passing through the property or water bodies located within the property) would command a premium over property with development constraints

 

Summary

• Step 1: Identify a similar asset that has been transacted in the market or identify a similar asset available in the market for trade

 

• Step 2: After identifying the comparable, adjust a premium or discount for various factors as mentioned above

 

• Step 3: Calculate the average value of comparables post adjusting the premium or discount

 

Points to be Noted

• The market approach can also be used in different comparable evidence or units of comparison.
  • Example: arriving price per square foot (sft) of area, or rental value per sft.

 

• The unit comparison used by the valuer can also differ between asset classes like commercial, residential, retail, etc.

 

• While assessing the property value through the market approach, we should have sufficient information about the comparable be it a transaction or one available for trade

 

• Information about comparable transactions or those available for trade should be from a reliable and trusted source

 

• Transactions comparable that happen close to the valuation date represent the current market trends compared to older transactions