Valuation methods

How do you establish the “true” value of a property?

The legal definition of property market value is rooted in section 194 of Germany’s Building Code (Baugesetzbuch); in simple terms, it is a price forecast for a given sale date under normal business conditions. The reason why market values and the prices visualised by property owners are not always entirely congruent is to be found in the subjective considerations that apply to any property; these are the result of personal opinion or emotional factors. By contrast, market values are based purely on the legal remit, i.e. an estimation of the price most likely to be achieved in compliance with legal procedures.

The legal basis for establishing property market values and appraising easements and ground rents is set out in the German Ordinance on the Valuation of Property (Immobilienwertermittlungsverordnung, or ImmoWertV) and any legally watertight valuation will be based on the procedures outlined here.

There are various distinct methods:

• Cost approach, section 21ff. of the ImmoWertV

Asset value comprises the land value plus the present value of the building fabric and any adjustment of the market value ratio on the transaction date. Building costs are calculated with reference to the standard building costs (Normalherstellungskosten, NHK 2010) issued by the Federal Ministry of Transport, Building and Urban Development (Bundesministerium für Verkehr, Bau und Stadtentwicklung) and extrapolated using the current building price index on the transaction date. Typical asset value properties include e.g. detached or semi-detached houses.

• Comparison method, section 15ff. of the ImmoWertV

With this valuation method, property purchase prices that appropriately reflect the features determining the value of the property to be appraised are taken from the transaction register of the relevant Property Valuation Committee. Any differences are incorporated with appropriate additions or deductions. The market value is as a result the weighted arithmetic mean derived from the adjusted sale prices of the comparator properties. Typical comparators include unused building land or standardised property types such as terraced houses or condominiums.

• Income approach, section 17ff. of the ImmoWertV

This approach is used for property that is intended to generate an income stream. The market value is calculated from a current cash value based on an average market unheated lease or rental income and the discounted value of the land. Typical income properties include commercial property or capital investments.

• Appraisal of leaseholds

A leasehold is a special case in which the land and the building upon it do not belong to the same owner. The valuation can thus be carried out on behalf of the lessor and the lessee for the same property. Selection of the correct valuation method is dependent on the specific features of the property. A standardised method is set out in the ministry’s valuation guidelines (Wertermittlungsrichtlinien, or WertR).

The market value for leasehold land with a building on it is based on the capitalised advantage of use of the land over freehold possession.