Present value

The present value of a property is the present value of future net cash flows of the building plus the land value of the property. In accordance with section 17 of the Immobilienwertermittlungsverordnung (ImmoWertV – German Property Valuation Ordinance), it is divided into the land value and the present value of the building structures. The land value is calculated in line with the sales comparison approach in accordance with section 16 ImmoWertV. However, the present value of the building structures is calculated on the basis of the standard market rental income. If the income ratios deviate from the standard market income, periodically different income can also be used to calculate the present value. The value is calculated on the basis of this income as the present value of future benefits. The present value is the capital value which is the total of the forecast future net cash flows of a property discounted using the property interest rate.1

The following key parameters are needed to calculate the present value:

Calculation of annual gross income:
Annual gross income arises from the proper management and permitted use of property through the sustainable rents and leases. The normal market rents for the area are sustainable in this context. If the actual rental income deviates from market rents, this discrepancy is taken into account in the calculation of the present value. Advances on operating costs are not taken into account.2

Calculation of management costs:
The standard management costs incurred for the proper management and permitted use are deducted from annual gross income. These are items that cannot be recovered from the property’s tenant in the utility bill. These typically include administrative costs, maintenance costs and the risk of lost rent.3

Deriving the property interest rate:
In accordance with section 14 ImmoWertV, the property interest rate indicates the standard average interest on the fair values of properties. Under the German income approach, a property interest rate is derived on the basis of suitable purchase prices and the associated net income, for similar properties and taking into account the remaining useful life of the building (section 14(3) ImmoWertV). Using the property interest rate, the land value interest can be subtracted from the annual net income to take into account the differences between land and building structures.4

Determination of multiplier:
The multiplier is calculated from the economic remaining useful life of the building and the property interest rate. The multiplier and the net income of the building structures together produce the present value of the building structures. The land value is added to this value to determine the present value of the property.5

The German income approach is always used when the priority is the generation of a return. Typical present value properties are apartment buildings, owner-occupied apartments, retail space, office properties or logistics and industrial properties.6
  • 1 Vgl. Kleiber, Wolfgang (2010): Verkehrswertermittlung von Grundstücken. Kommentar und Handbuch zur Ermittlung von Marktwerten (Verkehrswerten), Versicherungs- und Beleihungswerten unter Berücksichtigung der ImmoWertV, 6. Aufl. Köln, S. 1523-1533.
  • 2 Vgl. Leopoldsberger, Gerrit; Thomas, Matthias; Naubereit, Philipp (2008): Immobilienbewertung. In: Schulte, Karl-Werner: Immobilienökonomie, Band I, 4. Aufl. München, S. 480-489.
  • 3 Vgl. Matthias, Thomas unter Mitarbeit von Brauers, Maximilian; Hocke, Stefan (2011): Immobilienbewertung. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 791-797.
  • 4 Vgl. Sommer, Goetz; Kröll; Ralf (2008): Lehrbuch zur Grundstückswertermittlung, 2. Aufl. Köln, S. 185-189.
  • 5 Vgl. Leopoldsberger, Gerrit; Thomas, Matthias; Naubereit, Philipp (2008): Immobilienbewertung. In: Schulte, Karl-Werner: Immobilienökonomie, Band I, 4. Aufl. München, S. 480-489.
  • 6 Vgl. Kleiber, Wolfgang (2010): Verkehrswertermittlung von Grundstücken. Kommentar und Handbuch zur Ermittlung von Marktwerten (Verkehrswerten), Versicherungs- und Beleihungswerten unter Berücksichtigung der ImmoWertV, 6. Aufl. Köln, S. 1523-1533.
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http://www.corpus-sireo.com/en/glossary/present-value
: 18.09.2019