2 The Concept of Market Value

      2.1 Introduction

      There are two fundamental value concepts: Market value and Investment value or Worth (IVSC 2019 , p. 17). Investment value is a rather uncomplicated concept as it simply refers to the value from a specific owner's/investor's perspective. This is calculated by a standard investment analysis in the form of a cash‐flow analysis. The inputs are then expected net operating income from that actor's perspective and the rate of return this actor demands and the expected residual value at the end of this actor's expected holding period. Such a residual value is normally calculated from the expected net operating income at the end of the calculation/holding period.

      Market value is important in a number of different contexts, e.g. when transactions are made, when property is used as collateral for lending and in financial reports. The fact that this value concept is so important, and as will be clear below, rather complicated, it is important to look closer at the definition of this concept. A number of aspects will be covered in this chapter, but value concepts will also be discussed in Chapter 5, and in Chapter 6. In Chapter 6 the concept of Fair value and its relation to market value will be discussed. It could also be useful to be aware of the distinctions between entry price and exit price explained in that chapter, where entry price at the date of a transaction is what has been paid and exit price what could be fetched if the property is sold at that date.

      There are also other economic (value) concepts than market value and investment value that may be relevant in different situations. Examples of such value concepts are acquisition cost/‐value, replacement cost/‐value or long‐term values of different kinds. We will further discuss such value concepts in Chapters 5 and 6.

2.2 Standard Definition

      The International Valuation Standards defines market value as follows (IVSC 2019 , p. 18):

      Market value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction after proper marketing where the parties had each acted knowledgeably, prudently, and without compulsion.

      This definition is also the official one in the United Kingdom and accepted by RICS. In the RICS Valuation – Global standards (RICS 2019 ), the standards from IVSC are included in full as Part 6 of that book.

      The US Appraisal Institute presents the following definition (Appraisal Institute 2013 , p. 58):

      The most probable price, as of a specified date, in cash or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgably, and for self‐interest, and assuming that neither is under undue duress.

      Looking closer at these definitions, some common elements can be found:

      But there are also some differences:

      Another problem that will be discussed in this chapter is the relation between turnover and market price, and whether turnover in some way should be included in the definition (Section 2.8). In both the standards, there is also a discussion about ‘highest and best use’ and this will be discussed in Section 2.9.

2.3 Criteria for a Good Definition: Clear, Measurable, Concise and Relevant

The point of making a definition is to clarify a concept and therefore the words used in the definition must be clear in the sense that they are interpreted and applied in a similar way by different actors.¹ If a word is vague, there might be disagreement about whether it is correct to apply it in a specific situation. Additional explanations may sometimes be needed to make sure that the readers will apply the term in the same way and such clarifications can, for example, be found in IVSC (2019 , pp. 18–20).

      A second criterion for a good definition is that it refers to things that are measurable, at least in principle. If valuers disagree, it should at least in a number of circumstances be possible to find data that indicate which estimate is closer to the truth. RICS (2019 , p. 2) states that ‘Consistency, objectivity and transparency are fundamental to building and sustaining public confidence and trust in valuation’. Objectivity in the context of a definition could be interpreted as that there exist data/evidence that substantiate at least a claim that the market value is closer to A than to B.

      A definition should also be concise and not include terms that do not add any further content to the definition. This condition is sometimes referred to as Occam´s razor, i.e. unnecessary components in the definition should deleted.

      The final condition