German income approach

The income approach is used to determine the value of income property through capitalization of the net revenues to be generated permanently with these objects ( yield value = present value of future surpluses of income and expense and cash receipts and payments ). It is especially used in the assessment of a company or of a rented or leased land.

  • 2.1 IDW S1 - Principles for the implementation of company valuations ( Germany )
  • 2.2 KFS BW 1 - Expert Opinion Corporate Rating ( Austria )
  • 2.3 Swiss income approach for businesses 2.3.1 Valuation basis
  • 2.3.2 calculation

Earnings method in real estate

The income approach is particularly useful for plots of land in consideration for which the permanent recoverable amount for the value assessment of the market is in the foreground, for example:

  • Residential rental properties ( apartment buildings )
  • Commercial properties (office and commercial buildings, shopping centers)
  • Special properties ( parking garages, hotels, logistics areas )
  • Mixed -use properties

Usually, the income approach is not for owner-occupied residential real estate or real estate such as one-and two -family homes and condominiums, (possibly in addition to property value method ) applied whose value normally in the sales comparison approach. Also usually does not apply to the income approach for rented or specially equipped special properties of, such as special production facilities, infrastructure facilities such as railway stations, cultural property and militarily occupied land.

German income approach

In Germany, the predominant in the Real Estate Valuation Ordinance ( ImmoWertV ) is [ to June 30, 2010: Valuation Ordinance (§ § 15 to 20) ] and the valuation policies described income capitalization approach. A special feature is the splitting of the valuation of land on the one hand and in the assessment of the building on the other. The income approaches are the base case on the one hand permanently (constant) and on the other hand finally ( assumed remaining useful life).

First, the value of land is determined what is to be done in the sales comparison approach, whereby value-influencing factors, such as rights in rem must be appropriately addressed. Then a permanently achieved rent is determined by the size, quality, features, etc. of merchantability rental space. As far as the current rent is above or below, this can be accounted for by ( to capitalizing ) increases or reductions.

The recoverable per year total income ( in addition to the rent, other income influence ) gives the gross annual income ( gross operating income ). Deduct from this is the non- reversible ( the tenant) proportion of management costs: operating costs, management costs, maintenance costs and loss of rental income ( is uncollectible arrears of rent within the meaning of bad debts, permanent vacancy reproduce elsewhere, such as the gross profit or as a risk premium for property rate ). The result is the net income before the deduction of interest on land value, so the fact the owner of the object available cash flow ( net operating income ).

The above- identified land value is the property rate (LZ), which is determined by the valuation committees empirically multiplied. The height of the LZ is dependent on the location (Region / City / Street ) and use of the property. Here, the proposed value before the application is possibly object customize, that is, from an uncritical assumption is not recommended. The result of the multiplication is the land value interest rate, which is deducted from the calculated net income before interest on land value. This results in the net income. This approach on the other hand reflects the distinction made in the German evaluation practice ( fictional ) separation of land on the one hand and physical structures resist as an independent economic goods, which corresponded moreover with the accounting practice.

Since the usability of buildings is finite, it is important to determine how long the building economically (not technical) is available. Here the NHK 2010 and the literature provide the relevant information, it being noted that, for example, the oft-quoted 60-80 years total useful life of office building from today's perspective are quite long. Total useful life minus age results in the remaining useful life that can be extended if necessary due to renovations made ​​. Financial Mathematics of net income is considered to be constant payment over a limited period and can therefore be capitalized. The so-called Diskontierungssummenfaktor or multiplier is derived from the remaining useful life and the property interest, the LZ is the risk that applies to the future cash flows. The derivation of this factor is financial mathematics or using the table contained in the ImmoWertR. The multiplication of the net proceeds to the multiplier gives the capitalized value of the buildings and structures, which is necessary, to correct value-influencing factors such as maintenance backlog. The value of the buildings and structures plus value of the land gives the yield value of the developed land.

According to the ImmoWertR also a simplified income approach is allowed, which makes the land value and the land value interest in mind, and ultimately considers only the physical structures, similar to the ( income approach), in many English-speaking countries. In this method, the land value of the property ( § 17 para 2 No. 2 ImmoWertV ) is defined as the discounted value of land part of the capitalized value.

For a first approximation to the value of a property, it is also common outside standardized method to reproduce the gross profit with a multiplier. The result, however, tend to be inaccurate, if not practiced by many years of experience of the estimate ends, and is therefore also disparagingly referred to as "broker process". In addition, the result is less transparent than a value determined in the income approach value at which the value drivers understandable.

International Income Approach

In the international space methods provide the earnings valuation, the dominant valuation approach represents the data base and calculation methods differ, however, from the German, normalized earnings method. The international process gain in the course of international transactions in Germany in importance. The fundamental difference is that the value of the land which is built primarily from current leases and re-letting the scenarios is derived. On an artificial splitting into partial proceeds from the soil or from the building will be omitted. The building age plays a minor role, it is considered mainly through increased cost estimates and risk premiums on the capitalization rate. Compared to the German method offers the both advantages and disadvantages.

The most widely used method is the investment method or income approach. Permanently recoverable net income from the buildings In brief, then derived (similar to the German method, but more management costs are in the Anglo- Saxon countries, depending on the design of a lease substantially folded ) and capitalized as a perpetuity, that is, the remaining useful life is theoretically infinite considered. This is not a problem in buildings with high residual useful life as the present value of income tends not later than the 30th year towards zero. This discounting is financialmathematically with the yield, that is, an interest rate, which, in addition to the risk of future revenues (mostly depends on usage ) also positionally and building -related influences as well as the inflation maps. The derivation is sometimes quite transparent.

International on the rise, the DCF method ( discounted cash flow ). Here are ( in principle, the same approach ), the cash flows in Nahzeitraum per period ( year ) is determined separately for each period and assumed the medium to long term in its development as a constant uphill. Advantage of this approach is the detailed consideration of the relevant period, eg for imaging of upcoming investments, etc. Then, the cash flows for the periods are discounted to the valuation date, the discount rate can market and property- dependent fluctuate greatly ( Including special risks).

Depending on the country or region there are certain standards. The international procedures by organizations such as RICS or TEGoVA codified (Red Book, Guide Bleu, etc.).

Company Reviews

IDW S1 - Principles for the implementation of company valuations ( Germany )

According to company valuation standard IDW S1, the enterprise value determined during the income approach by discounting the enterprise owners accruing financial surpluses.

The capitalization rate is a base rate of an alternative system (quasi- risk-free capital market system) and it is a risk premium made ​​and personal income taxes are taken into account. The personal income tax is assumed to be a typed interest rate of 25% ( withholding tax ).

KFS BW 1 - Expert Opinion Corporate Rating ( Austria )

The expert opinion KFS BW 1 was issued by the Chamber of Public Accountants. The enterprise value is calculated in the income approach by capitalizing the net proceeds to the company owners.

The capitalization rate is dependent on whether on an objective or a subjective value of the company is to be calculated.

In the calculation of a subjective enterprise value is referred to the specific individual specific conditions in the evaluation subject ( investor).

In calculating an objective business value of the return on an alternative investment is to be used. It is important to pay attention to the run-time, risk and availability equivalence between alternative investment and valuation object. Output variable for determining the rate of return on alternative investment is an equity portfolio ( base rate ). This means that the KFS BW 1 differs fundamentally from its German counterpart (IDW S1). The base rate should be increased by a market-based risk premium and to reduce a growth discount. Income taxes must also be considered.

Swiss income approach for businesses

Valuation basis

The return value starts from the idea that a company is an investment and its value is derived from the recoverable amount and the expected return. Alternatively, a potential successor might consider to invest the money in good -yielding securities. How this must discard sufficient proceeds in the form of future profits generated also invested enterprise award. The key therefore is the future profitability, which is estimated on the basis of a budget over a period of 2 to 5 years. From this the successor of the income, not only the necessary investments in the company, but also the interest and amortization payments ( debt service ) from the takeover of the company finance. The operating substance is the only means to achieve the purpose; namely to achieve the operating performance and is not considered. In contrast, the non-operating substance is evaluated separately and added to the income value.

Calculation

When an income capitalization method, the enterprise value U is calculated using the following formula:

Where denotes the average operating income, adjusted operating income and the capitalization rate λ.

Derivation: the return value is the sum that would bring as bank deposits with the same interest the same yield.

The estimate of future earnings is thus based on the average adjusted operating income typically the last three years. In its determination, the annual results are adjusted with respect to non-operating, non-period and extraordinary income and expenses as well as a objectified imputed wage.

The capitalization rate λ is calculated as follows, where the corresponding figures may vary in specific situation and represent only rough example values ​​here:

Results in this case as the sum of the capitalization rate λ = 10 %

In the income approach is the difficulty in the rule when determining the discount rate, as this had a significant effect on the amount of the company's value. That depends in the specific case of the levels of the risk assessment and the adoption of the future interest and inflation from. The determination of the risk premium is affected by factors such as the accuracy of the determination of future surplus (profit fluctuations ), the financing structure of the company, the legal form, the industry, the competitive conditions, the internal independent from the transferor organizational structure, corporate culture and the resaleability.

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