Real estate is one of the most important assets. This is expressed in Germany’s national accounts where net construction assets are 86% of total net fixed assets.1In addition the usage of real estate belongs to the basic needs of people. Consequently the disposition of real estate regarding construction and acquisition contributes strongly to economical development of net stock of fixed assets within a national economy. However, in the valuation of property particular difficulties appear that complicate rational capital disposition. Basically, property valuation methods are difficult to apply or even fail in respect of rental income forecasts, assessment of risk and market orientation. Other influential factors originate from the heterogeneous character of properties and the complex structure of real estate markets. This work aims for the examination of codified and international property valuation methods in terms of their theoretical structure, practical application and critical aspects that influence a precise property valuation. In the following, principles regarding property valuation are introduced. This is followed by a detailed description of codified and international valuation methods. Subsequently all methods are applied on a real world valuation example that illustrates the methods and their applicability. Afterwards some decisive valuation methods are critically reviewed regarding their methodology, applicability and marketability. In summary the reader is given a classification in form of a matrix that is based on the aforementioned criteria. Further, some favourable components are identified that are complemented with recommendations for the use in practice.
Table of Contents
1 Executive Summary
2 Principles of property valuation
2.1 Characteristics of the property market
2.2 German surveyors in international comparison
2.3 Definitions of value
2.4 Valuation methods and regulations
3 Codified valuation methods
3.1 Vergleichswertverfahren (sections 13-14 WertV)
3.1.1 Basic principle and procedure
3.1.2 Requirements for application
3.1.3 Provision for adjustments
3.1.4 Calculation of the Vergleichswert and deviation of the Verkehrswert
3.2 Ertragswertverfahren (sections 15-20 WertV)
3.2.1 Basic principle and procedure
3.2.2 Determination of annual net income
3.2.2.1 Annual gross income
3.2.2.2 Management and maintenance costs
3.2.3 Determination of annual income attributable to the building
3.2.3.1 Determination of return on land value
3.2.3.1.1 Derivation of real property interest rate
3.2.4 Determination of multiplier and other factors influencing value
3.2.5 Determination of land value
3.2.6 Calculation of the Ertragswert and deviation of the Verkehrswert
3.3 Sachwertverfahren (sections 21-25 WertV)
3.3.1 Basic principle and procedure
3.3.2 Determination of the value of built assets
3.3.2.1 Cost of constructing the building
3.3.2.2 Deduction on account of age
3.3.2.3 Deduction on account of physical deficiencies and structural damages
3.3.2.4 Addition or deduction of other factors
3.3.3 Determination of value of additional ground
3.3.4 Determination of land value
3.3.5 Calculation of the Sachwert and deviation of the Verkehrswert
4 International valuation methods
4.1 Comparative method
4.1.1 Basic principle and procedure
4.1.2 Critical review of the comparative method
4.2 Investment method
4.2.1 Basic principle and procedure
4.2.1.1 Current rent and rental value
4.2.1.2 Outgoings
4.2.1.3 Yields
4.2.2 Growth implicit models
4.2.2.1 Rack-rented properties
4.2.2.2 Under-rented properties
4.2.2.2.1 Term and reversion approach
4.2.2.2.2 Top slicing approach
4.2.2.3 Over-rented properties
4.2.3 Growth explicit models
4.2.3.1 Short-cut discounted cash flow method
4.2.3.1.1 Implied rental growth rate
4.2.3.1.2 Critical review of the short-cut discounted cash flow method
4.2.3.2 Discounted cash flow analysis
4.2.3.2.1 Free cash flow
4.2.3.2.2 Discount factor
4.2.3.2.3 Terminal value
4.3 Cost approach
4.3.1 Basic principle and procedure
4.3.2 Critical review of cost approach
4.4 Residual method
4.4.1 Basic principle and procedure
4.4.2 Critical review of the residual method
4.5 Profits method
4.5.1 Basic principle and procedure
4.5.2 Critical review of the profits method
5 Real world valuation example
5.1 Location and market conditions
5.1.1 Macro-location Stuttgart
5.1.2 Micro-location of property to be valued
5.1.3 Market conditions
5.2 Property description
5.3 Property valuation
5.3.1 Comparative method
5.3.2 Ertragswertverfahren
5.3.3 Sachwertverfahren
5.3.4 Growth implicit model
5.3.5 Discounted cash flow method
5.3.6 Residual method
5.4 Analysis of the results
6 Critical review of the property valuation methods
6.1 Critical review of Vergleichswertverfahren
6.1.1 Methodology
6.1.2 Applicability
6.1.3 Marketability
6.1.4 Excursus: Vergleichswertverfahren versus comparative method
6.2 Critical review of Ertragswertverfahren
6.2.1 Methodology
6.2.2 Applicability
6.2.3 Marketability
6.3 Critical review of Sachwertverfahren
6.3.1 Methodology
6.3.2 Applicability
6.3.3 Marketability
6.3.4 Excursus: Sachwertverfahren versus cost approach
6.4 Critical review of growth implicit models
6.4.1 Methodology
6.4.2 Applicability
6.4.3 Marketability
6.5 Critical review of growth explicit models
6.5.1 Methodology
6.5.2 Applicability
6.5.3 Marketability
6.6 Summary of critical reviews
7 Summary
Objectives and Core Topics
This thesis examines various property valuation methods—both codified German standards and international approaches—to determine their effectiveness, practical application, and critical limitations. The primary objective is to evaluate how these different models perform when applied to a real-world scenario, ultimately providing practitioners with guidance on selecting the most appropriate valuation method for specific market conditions.
- Comparison of German codified valuation methods (Vergleichswertverfahren, Ertragswertverfahren, Sachwertverfahren) with international models.
- Detailed analysis of theoretical structures and critical assessment criteria such as methodology, applicability, and marketability.
- Application of multiple valuation techniques to a case study property in Stuttgart.
- Critical review of the reliability of valuation inputs and the impact of market fluctuations.
- Recommendations for professional practice, advocating for the combined use of multiple valuation methodologies.
Excerpt from the Book
3.1.2 Requirements for application
The use of direct or indirect price comparisons depends strongly on the comparability of the property’s individual attributes. According to section 13(1) WertV the property to be valued has to be in adequate conformity with the comparable sales price in its attributes. In detail, this means the following attributes:
Spacious location (state, region, trading area, rural area)
Location in the city (centre/outskirts, quarter and its reputation)
Infrastructure (transport connection, shopping facilities, schools, leisure facilities)
Bordering uses and impacts (traffic, industry, bothering and benefiting uses in the near environment)
Frequency of pedestrians and traffic (only for commercial properties)
Topographical conditions (accessibility, view)
Soil conditions, contaminations, legacy damages
Land’s size and layout
Character, scope and location of existing constructional facilities on land
Standard, maturity and state of maintenance of constructional facilities
Defects or deficiencies in construction.14
According to German legacy, deviations that result in sales price modifications are not allowed to exceed 30% to 35%.15 The number of necessary sales prices depends strongly on the individual case. If few sales prices have high significance they can be sufficient as valuation basis. Otherwise, at least 10 to 20 comparable sales prices have to be applied to achieve a statistically reliable valuation result.16 In case of the situation that no comparable properties can be identified there are the following alternatives: First, it is possible to consider sales prices of objects in similar areas regarding population, size and structure.17 Therefore, local Gutachterausschüsse can provide an insight into anonymous collections of sales prices.
Summary of Chapters
1 Executive Summary: This chapter provides an overview of the importance of real estate as an asset class and outlines the thesis's goal to critically examine codified and international valuation methods.
2 Principles of property valuation: This section details the fundamental characteristics of property markets, compares the professional standing of German surveyors with international counterparts, and defines core value concepts.
3 Codified valuation methods: This chapter provides a technical deep-dive into the three mandatory German valuation methods (Vergleichswertverfahren, Ertragswertverfahren, and Sachwertverfahren).
4 International valuation methods: This part introduces various international techniques, including the comparative method, investment method, residual method, and profits method, analyzing their underlying logic.
5 Real world valuation example: Here, the previously described methods are applied to a specific property in Stuttgart to demonstrate their practical utility and compare the resulting valuation ranges.
6 Critical review of the property valuation methods: This chapter synthesizes the findings by critically evaluating each method based on its methodology, applicability, and marketability.
7 Summary: The concluding chapter reiterates the complexity of property valuation and recommends the adoption of the discounted cash flow method and the simultaneous use of multiple valuation techniques in practice.
Keywords
Property Valuation, Real Estate, Codified Methods, International Valuation Standards, Verkehrswert, Ertragswertverfahren, Sachwertverfahren, Discounted Cash Flow, Market Value, Investment Method, Comparative Method, Real Estate Investment, Valuation Practice, Property Market, Stuttgart
Frequently Asked Questions
What is the primary focus of this thesis?
The work focuses on the examination of both codified (German) and international property valuation methods, analyzing their theoretical foundations, practical application, and potential for accurate valuation.
What are the core valuation themes discussed?
The core themes include the comparative method, investment valuation, the German codified methods (Vergleichswertverfahren, Ertragswertverfahren, Sachwertverfahren), and modern discounted cash flow (DCF) techniques.
What is the main research question or objective?
The objective is to investigate the suitability of different valuation methods and determine which factors influence a "precise" valuation in a market characterized by heterogeneous properties and opaque data.
Which scientific methods are employed?
The author employs a comparative analytical approach, evaluating theoretical frameworks against practical application, and applies these methodologies to a real-world case study in Stuttgart to identify deviations in valuation results.
What does the main body of the work cover?
The main body covers the principles of property valuation, a detailed description of codified German methods and international alternatives, a practical case study application, and a critical, multi-dimensional review of all methods.
Which keywords best characterize this work?
Key terms include Property Valuation, Codified Methods, Ertragswertverfahren, Discounted Cash Flow, and Market Value.
What specific role do the "Gutachterausschüsse" play in German property valuation?
They are responsible for contributing to market transparency by collecting and publishing sales prices, standard land values, and market reports based on official data, serving as a critical resource for professional surveyors.
How does the author explain the "circularity problem" in the Ertragswertverfahren?
The problem arises because the input variable 'p' (real property interest rate) is needed to calculate the value, which in turn determines 'p'. The author suggests solving this through mathematical iteration until the estimated and calculated values align.
What conclusion does the author reach regarding the use of valuation methods in practice?
The author recommends that practitioners should use at least two different valuation methods to cross-validate results and advocates for a stronger adoption of the discounted cash flow method in the German context.
- Quote paper
- Stefan Hocke (Author), 2006, The valuation of Real Estate in Germany, Munich, GRIN Verlag, https://www.grin.com/document/53168
