Residual method used for commercial real estate valuation and its sensitivity

Abstract

In real estate valuation it is essential to understand the modelling of the economic potential of the property. The residual value is in many cases the only possible way how to determinate market value of the undeveloped land or property under construction which is important for investors, banks or auditors. The methodology of calculation for residual method is described in several valuation standard. These standards are usually very general so they can be applied in different markets. The residual method of valuation is very sensitive to changes in key inputs. Small changes in variables such as sales volumes or build costs will have a disproportionate effect on residual value. The article is focused on the sensitivity of the residual method to changes in key inputs. Sensitivity analysis is tested on a model suitable especially for commercial real estate valuation and reflect current market conditions.