Paper 1 · Real Estate Market
Property Valuation: The 5 Methods (with worked examples)
Must-know for the exam
- Valuation estimates worth for a purpose (sale, mortgage, insurance, compensation) using five methods: comparison, investment, cost, residual and profits, matched to the property type.
- The comparison (market) method adjusts recent sales of similar properties for size, floor level, tenure, condition, location and time, and dominates HDB and condo valuations.
- Under the investment (income) method, value = net annual income ÷ cap rate: $60,000 at 5% = $1,200,000, at 6% = $1,000,000.
- A higher capitalisation rate produces a lower capital value for the same income, because the cap rate reflects risk; candidates often get this backwards.
- The cost (contractor's) method is a last resort for special-purpose properties: land value plus the depreciated replacement cost of the buildings.
- The residual (development) method gives land value as GDV minus costs minus profit: GDV $50m − $30m costs − $8m profit = $12m.
- The profits (accounts) method applies where property and business are inseparable (hotels, cinemas, petrol stations), capitalising the fair maintainable operating profit attributable to the property.
- Key principles: highest and best use (most profitable legally-permissible use), substitution, supply and demand, anticipation, and contribution (an $80k renovation may add far less).
- Market value is the price in an arm's-length sale between willing parties; forced-sale value is lower, and insurance value is the rebuild cost excluding land.
- Price is what is actually paid, cost is what it takes to create, and value is worth to a party; the three must not be confused.
Valuation estimates what a property is worth for a particular purpose — a sale, a mortgage, insurance, or compensation on acquisition. The RES exam expects you to know the five methods, when each applies, and the basic calculations behind the two that involve arithmetic.
The five methods at a glance
| Method | Best for | Core idea |
|---|---|---|
| Comparison (market) | Residential & common properties | Compare recent sales of similar properties; adjust for differences |
| Investment (income) | Income-producing (shops, offices, rented units) | Value = net annual income ÷ capitalisation rate |
| Cost (contractor's) | Special-purpose (schools, places of worship) | Land value + depreciated replacement cost of the building |
| Residual (development) | Development / redevelopment land | Gross Development Value − development costs − profit = land value |
| Profits (accounts) | Trade-tied (hotels, cinemas, petrol stations) |
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Practise exam-style questions on Real Estate Market — with instant answers and explanations.
Practise Real Estate Market questions →Exam-style questions on this topic
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Common questions
- Which valuation method is most common for HDB flats and condos?
- The comparison (market) method — it compares recent transactions of similar units and adjusts for differences, which works well where there's an active market with good comparable sales.
- How does the capitalisation rate affect value in the investment method?
- Value = net income ÷ cap rate, so a higher cap rate produces a lower capital value. A higher cap rate reflects greater risk or weaker demand, so the same income stream is worth less.
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