Valuing real estate held in the company
How an independent valuation report treats property held on a company's balance sheet, and why book value often diverges from current market value.
Real estate held by a company is usually recorded on the balance sheet at historical cost less depreciation, which can differ substantially from its current market value, particularly for property held over a long period. An independent valuation report typically identifies such assets separately and reflects their current value, rather than relying on the book figure used in the statutory formula.
- Book value of property reflects historical cost, not current market value.
- A valuation report treats real estate as a distinct component of the balance sheet.
- The gap between book and market value can be significant for long-held property.
Book value and market value are different figures
Under standard accounting treatment, real estate is recorded on the balance sheet at its acquisition cost, then reduced over time through depreciation. This figure reflects an accounting convention, not an estimate of what the property would be worth if sold today. For property acquired many years ago, the difference between the two can be substantial.
Since equity, as used in the statutory formula, is built directly from these balance sheet figures, a company holding property at a depreciated book value far below its current worth will see that gap carried straight into the formula's result, without correction.
Property is treated as a distinct component in a valuation
An independent valuation report typically separates real estate from the operating business, particularly when the property is not essential to the company's core activity, such as a building held for rental income or as a long-term investment rather than for the company's own use.
For each significant property, the report considers its current value, which may draw on an external appraisal, comparable market transactions, or other recognised valuation approaches for real estate, rather than the depreciated figure carried on the balance sheet.
Operating real estate is treated differently from investment property
Where a property is used directly in the company's own operations, such as a workshop or office the business occupies, its value is often considered alongside the operating business rather than isolated entirely, since removing it would affect the company's ability to function as it currently does.
Where a property is held mainly for investment purposes, generating rental income or appreciating independently of the company's trading activity, it is more commonly valued as a separate asset, with its own current value added to the operating value of the business.
This is closely related to how patrimonium companies are assessed
Companies whose primary activity is holding property, rather than an operating trade, present an even sharper version of this issue, since most or all of the balance sheet consists of assets whose book value diverges from market value. This is one of the reasons the statutory formula tends to fall short for such structures.
Supporting documentation for property values
When real estate forms a material part of a company's balance sheet, gathering existing appraisals, recent comparable sale prices in the area, or details of the property's condition and rental situation ahead of a valuation exercise helps establish a current value with a clear evidentiary basis.
Questions on this
Why does book value understate property worth
Book value reflects historical acquisition cost reduced by accumulated depreciation, an accounting convention rather than a market estimate. Property held for many years, in particular, can be worth considerably more than its depreciated book figure.
Is all company-held real estate treated the same way
No. Property used directly in the company's operations is often considered alongside the operating business, while property held mainly as an investment is more commonly valued separately, with its current value added to the result.
Does the statutory formula account for real estate value
No. The formula uses equity as reported on the balance sheet, which reflects book value rather than current market value, so any gap for property holdings is not corrected under the formula.
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This information is general. It does not take your specific situation into account and is not tax advice.