Is the price of real estate equal to the subjective value attributed to it? Is the value of real estate equal to the (market) price? Or in plain language; is the value of real estate equal to what the fool gives for it? A clearer distinction is made between price and value through the use of three different words: value, price and worth.
- Market price (value): Estimation of the price at which the real estate can currently be sold in the market.
- Price: Current trading price in the market.
- Intrinsic asset value (worth): Personal (subjective) estimate of the net asset value by the stakeholder(s).
Only the price exists, as this is the amount stated in the offer brochure or in the rental or purchase agreement. The value of real estate does not exist, because this is an individual and therefore a subjective estimate. The REN method is extremely suitable for making explicit from the perspective of the actual user his desired intrinsic value (fit for purpose) and comparing the buildings on offer.
In the valuation of real estate, a balance must be found between the interests of the owner and the user. One of the essential differences is the timeframe to be looked at. The user is particularly interested in the optimization of his accommodation in the short term. The building must be located in the right geographic location in its market, it must be large enough and have the correct functional quality for its use.
The owner should look much more at the performance of the property in the long term and therefore also consider subsequent users and functions of use. He translates the location, the size of the building and the quality into a price. In addition, the risk of vacancy and achieving the desired return on the capital invested in the property also plays a role for an owner.
In other words, it is about the ratio between intrinsic value and the market price. The net asset value is determined by the individual value criteria of the stakeholder(s) seen from both the investors’ point of view and the occupants’ point of view. The market price is determined on the basis of market criteria.