How is property valued?

The property is valued here on the basis of comparable sales – that is, properties as similar as possible located near the property being valued. In practice, calculations are based on prices per square metre – that is, the price per square metre at which the comparable properties were sold is determined and this figure is multiplied by the property’s floor area. Naturally, this method only works if there is a sufficient number of comparable transaction prices available. Please note that asking prices are unsuitable for this method, as they often differ significantly from the actual sale prices. The sales comparison approach is often used for flats and similar types of houses (terraced houses or housing estate properties).

Under this method, the value of the land is determined separately from the value of the building – and the two are then added together. The value of the land is determined using the standard land value. The value of the building is determined using tables based on so-called standard construction costs (NHK). These NHK figures relate to one square metre of gross floor area (GFA) and are multiplied by the property’s GFA. With various adjustments (e.g. for special features such as swimming pools, fitted fixtures and special garden features), the value of the materials used and other costs that one would normally expect for a building of this type is thus determined – in simplified terms. Together with the value of the land, this building value constitutes the calculated real value of the property being valued. However, as supply is often – at least in Munich – significantly lower than demand, this real value frequently needs to be adjusted considerably to reflect the market price. Only an expert’s experience can help in this regard.

Here, the returns expected in line with market conditions form the basis for the valuation. The German method is too complex to explain briefly; however, in principle, this approach involves first calculating the rent that the property could command in line with market conditions – without taking actual rents into account. This market-rate rent is reduced by the costs normally incurred by the owner (e.g. loss of rent, maintenance, etc.) to arrive at the gross yield. Market participants are now assumed to have certain return expectations: high returns for high-risk investments and low returns for low-risk investments. As Munich is regarded as a very safe location, returns in central Munich are currently estimated at 2.50%–3.00%. Given the long lifespan of property, the gross yield is then capitalised at this rate of return (for the sake of simplicity, indefinitely). This gives the formula: gross yield / rate of return = capitalised value. After taking special factors into account (e.g. a rent that is currently higher or lower than the market rate), an expert can use this to determine the market value.