2009•RePEc: Research Papers in EconomicsRequires access
The Quality Rating System in Real Estate Valuation in Estonia
Veronika Ilsjan, Ene Kolbre, Aart C.A. Hordijk
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Abstract
"Real estate appraisers and market analysts in Estonia use various indicators to characterise the quality of real estate, and even those were mainly for offices and commercial real estate. So far, Estonia had no uniform real estate rating system that would have covered all types of real estate. The need to harmonise and ensure unambiguousness of the quality rating led to working out a new quality rating system for real estate valuation. The article seeks to provide an overview of the Estonian real estate quality rating system used for real estate valuation and the theoretical bases of its development. The new uniform quality rating system covers improved real estate used for residential, office, commercial, warehouse and production purposes. The quality grade in this system characterises the competitiveness of the object to be attractive for a similar type of tenants or buyers. The quality grade of a real estate object is determined on the basis of the potential income of this object considering the sustainability of this object, i.e. the principles of sustainable development and usage have to be taken into consideration in the assessment of every factor. As the market demand is the main factor influencing the income potential and sustainable development of real estate, then quality grade is determined based on the principle of market demand. Income potential is calculated on the basis of three characteristics: location and use of the parcel of land; quality of construction and management of the real estate. Each characteristic (location and use of parcel, construction quality and real estate management) is evaluated taking into account the factors that influence the respective characteristic and the situation where factual information on the object is insufficient. The rating is awarded to each characteristic separately, in a three-point system. The aggregate quality grade rating of a real estate object is formed on the basis of the assessments of the three characteristics."