20 The valuation of a specialised building for which there is no market is problematic for valuers and appraisers. The RICS Appraisal and Valuation Manual suggests using the 'Depreciated Replacement Cost' basis of valuation.
21 Depreciated Replacement Cost (DRC) comprises the 'open market value' of the land in the present use, plus the current gross replacement cost of the buildings and their site works. The buildings costs are depreciated by an allowance to reflect their condition and age, and their functional, economic and environmental obsolescence. These factors render the existing property less valuable than a new replacement.
22 Valuers have two approaches to depreciated replacement cost. One involves envisaging an exact replacement of the existing building, which can be artificial if the skills and materials do not actually exist to replicate that building. The second approach is to imagine a modern building that is a functional substitute, even if it is smaller, or differently configured to reflect modern circumstances.
23 DRC valuations are relatively specialised and advice should be sought from a professional property consultant. DRC figures are subjective figures, which reflect the value to the owner, rather than objective, transaction based, opportunity cost. They tend to be on the high side and require careful handling. DRC should only be used where there is a continuing operational need for the property (or the stream of services derived from it) over the period of the appraisal.