date | theme

23. December 2021 | Real estate sale after divorce or with separated spouses – Attention tax trap!

03. January 2022 | Property tax reform 2022: what is new?

03. February 2022 | The new property tax in Bavaria from 2025

10. February 2022 | Property tax in Hessen from 2025

14. February 2022 | Property tax in Lower Saxony from 2025

19. May 2022 | International evaluation methods: application before the courts? (this contribution)

For current international valuation methods, it is questionable whether real estate values can be determined in German courts. About this and about the similarity of different methods such as the DCF method or the Profits Method to the German methods we show in the following article. Finally, its scope will be assessed.

First of all, it should be noted that international evaluation methods are associated with increasing reputation. However, it is questionable to what extent these procedures may be applied in Germany. Therefore, it is first necessary to check their validity. In addition, it may be of interest to what extent the procedures work and whether they are even interesting for domestic processes.

In the international valuation context, discounted cash flow methods are common methods for valuing real estate. Various embodiments of the method or method exist. These methods are most similar in general to the income value method common in Germany. Among other things, it is used in the valuation of yield properties. However, for all DCF methods, two different proportions are calculated. On the one hand, the static share is used for the valuation of a property. On the other hand, a dynamic component is also required for this.

By using various factors such as management costs, rental income and resulting annual cash flows, the method thus represents a method with variable cash flows, with the present value to be determined including a dynamic period. This primarily includes cash flows, which are viewed over a horizon of ten years and evaluated using a financial mathematical process. As already mentioned, the static component, also called residual value, is now missing. This can easily be formulated as a potential purchase price at the end of the assumed term. The expected value of the property plays the only valuation factor in the case of a subsequent infinite period of use, but this can increase within the periodic period. Therefore, the residual value is subjected to a capitalisation interest rate.

Basically, this process arose as a valuation method for companies, more than 100 years ago. This method has long been used in the USA as a common way of valuing real estate. Among other things, in Switzerland, the procedure is also used to value large properties that serve as return objects.

From the international investment method, also understood as an investment method in German-speaking countries, similarities to the German income value method can first be identified. An infinitely long profitability of rental income of the rented objects is assumed. This eliminates the residual useful life, which is particularly relevant for DCF methods. This also eliminates the soil value as an evaluation factor. This represents a decisive advantage. Mainly investors from the UK are accustomed to valuing real estate on the basis of this procedure.

Important in the application and accuracy of the investment method is the rent incurred at the valuation time, which in the best case exactly reflects the current rental price situation. If there are strong deviations for comparable objects, one of two solutions can be used to remedy this. On the one hand, the deviations can be corrected by the "Term & Revision" method or the "Hardcore & Top Slice" method. The first method capitalizes the rent over the agreed contract period, i.e. the so-called term. In addition, therefore revision, the rental is now subsequently adjusted to the market conditions. This is thus assumed to be infinitely long from the time of adaptation. In the second method, one takes the annual rent, which is fixed and calculates this over the infinite period of use, whereby one speaks of hardcore. If the contractual rent is above this, the calculation adds a capitalized amount, the top slice, over the entire term.

Since this peculiarity has now been drawn attention to, it is necessary to proceed to the calculation. Thus, the following formula is used to calculate the market value in the investment method:

annual yield = annual raw yield – management costs

Market value = annual yield x factor (- non-occupational costs)

It is complicated to determine the factor that is oriented to the market conditions. Factors to be taken into account are the present value factor, the discount factor and the capitalisation rate, which includes rent losses.

The lease valuation method, also known internationally as the Profits Method, is logically used by investors and property owners to value leased land. The relevant variable is, among other things, the operating turnover.

Above all, properties of hotels and companies from the catering industry are evaluated accordingly. Frequently, this serves a loan of the same land, for which the future tenancy income is used. In turn, the turnover of the company is relevant, whereby often the turnover for several previous years must be proven. The necessary annual rental income to be determined is determined by applying rental rates deducting the landlord’s management costs, analogous to the net cold rent. This amount is discounted with a real estate interest to obtain the market value of the property.

Finally, it is important to know that extremely high level of expertise is necessary to evaluate such special properties. In addition, you hardly get knowledge about comparable transactions.

In addition, the Costs Method is partially mentioned as an international evaluation method. This method is often comparable to the property value method. Although this procedure does not apply in German courts, it can be interesting for international investors when valuing real estate of a non-profit nature. This includes mainly a theatre or a museum.

In addition, there is the so-called Comparison Method, which is equivalent to the comparative value method. This procedure primarily enables the valuation of condominiums and is helpful in determining the land value of undeveloped land.

In particular, the clarity of the discounted cash flow method as well as the transparency regarding the valuation are very clear advantages of this method. Payment flows resulting from the object as well as assumptions made by experts are disclosed in this procedure.

Here, assessors summarize the cash flows that have been incurred annually in a table. The same applies to the money flown, which also includes management costs and rental income and which must above all be related to the property. Thus, the data used are displayed in a comprehensible manner over a manageable period of time.

Two disadvantages of the DCF method in particular must be emphasized. The residual value has an enormous influence on the final height of the evaluation object. Because often more than half of the property value is based on it. In addition, logically, the seller, who strives for the highest possible value, can include a rent increase, which increases steadily, even if this will not necessarily be given.

In addition, and this will still be the biggest obstacle, the Real Estate Valuation Ordinance (ImmoWertV) has not recognized this procedure as a common method. This reason alone is decisive for the use of procedural methods. Otherwise, use by law is excluded. The legal German methods include the income value method, the substance value method and the comparative value method. However, the DCF method is used for other business analysis. This includes liquidity planning, but also the preparation of a forecast for the development of the investment can be based on this. In addition, it is possible to map financial planning via special properties with a high vacancy rate or planned and ongoing renovation measures.

International evaluation methods, which were mentioned above, are currently not common in Germany and have not yet stood firm in courts. Thus, it is still necessary to resort to the already recognized evaluation methods of ImmoWertV. The value method, the income value method and the comparative value method are relevant here.