Cost Approach

The cost approach estimates a property's value by adding land value to the current cost of constructing an equivalent building, less physical, functional and economic depreciation, on the principle that a buyer will not pay more than the cost of an equivalent substitute. It is one of the three approaches in the International Valuation Standards (IVS 103), alongside the market and income approaches, and is used especially for specialised properties that are rarely sold or leased, such as schools, hospitals, factories and petrol stations, for new buildings, for insurance and to cross-check other approaches. The steps are: estimate land value, usually by comparison; estimate replacement cost (a building of equivalent utility with modern materials) or reproduction cost (an exact replica); deduct depreciation, namely physical (wear and tear), functional (outdated design or systems) and economic or external (factors outside the property, such as regulatory change or weak demand); then add the results. In Saudi Arabia replacement cost is driven by construction material and labour prices, Saudi Building Code requirements and permit fees. Care is needed in districts where land prices have moved quickly: land may make up most of the value, and an old building may even be a liability if the highest and best use is demolition and redevelopment. Land prices themselves respond to decisions such as lifting restrictions on 81.48 km² of land north of Riyadh in March 2025 and to the White Land and Vacant Property Fees Law.