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Dipl.-Kfm. Christian Dürr - Immobilienmakler - Gründer von Isar Estate


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    Do you wish to learn more about property valuation?

    The picture shows the floor plan and building plans of a property, which are needed for a property valuation.

    Assessment of the market value for shares, investment funds and real estate property

    You may wish to know the current market value of your assets for many reasons. Especially if you are looking to sell a part of your assets, a correct determination of the current market value is vital for the optimal sale success.


    For assets such as securities traded on the stock exchange, the valuation is usually straightforward and transparent. Brokers continuously quote prices during the trading hours on all business days of the year. Equally, fund companies generally determine the net asset value of their listed funds every trading day.


    How is the situation for the value of your real estate property? The challenge in this market segment is that prices are not fixed continuously by brokers, as for the stock markets. So, how to come to an accurate market appraisal? This article describes the very sophisticated methodology of real estate valuation in Germany.


    A long tradition of real estate property valuation

    One of the core elements for a sound real estate valuation is the systematic recording and processing of land purchase prices. In Germany, the systematic collection of land purchase prices was started in 1893 by the Prussian Minister of Finance.


    In 1918, official valuation offices were established in Prussia. These were the forerunners of today’s expert committees for property valuation. The tasks and powers of the real estate expert committees are regulated in §§ 192 to 199 of the Baugesetzbuch (BauGB).



    Tasks of the official land valuation boards

    The core task of Germany’s official land valuation boards is to establish and maintain a sound database of all property transactions in their respective districts. On this basis, one can derive many essential pieces of information for a precise market appraisal.


    The determination of reference land values and the preparation of market reports are further essential tasks of the official land valuation boards. § 196 par. 1 BauGB defines reference land values as the average land prices, which are based on the official database of purchase prices. The respective development status of the land is also taken into account.


    For the city of Munich, the official land valuation board publishes the standard land values every two years. Additionally, the market report on Munich’s real estate market is published once a year in spring.


    Focus on the market value

    For the valuation of a property, the German legislator has set the focus on the determination of the market value as defined by § 194 BauGB. The main criterion is the price that can be obtained in the ordinary course of business, taking into account the location and other essential characteristics of a property. This model is based on the assumption that the seller, as well as the buyer, know all the relevant information and that they are both driven by objective decision-making criteria.


    The three standard approaches for the property appraisal

    In the German ‘Immobilienwertermittlungsverordnung’ (ImmoWertV), the German legislator lists three standard approaches for determining the market value of a real estate property:


    • Sales comparison approach (§§ 15, 16 ImmoWertV)
    • Income approach (§§ 17-20 ImmoWertV)
    • Cost approach (§§ 21-23 ImmoWertV)


    These three approaches are also applied worldwide in many international legislations.

    1. Sales comparison approach

    If applicable, the sales comparison approach is considered to be the most reliable method for the appraisal of a property. With this approach, all the available market data for property sale prices are used to appraise the real estate value. The sales comparison approach is used either in the form of direct or in the form of indirect price comparison.


    Direct price comparison

    In the direct price comparison, the recorded past sales prices of comparable properties form the principal element of the appraisal. For obtaining a correct valuation result, their characteristic features, such as the location, size, age and usage type, must be sufficiently comparable to the appraised property.


    Indirect price comparison

    In case of an infeasible direct price comparison due to the lack of comparative data, it may be possible to determine the market value by indirect price comparison. This approach makes use of the most fitting comparison factors, such as the reference land values from the official land valuation boards.



    In short, the sales comparison approach fits well if a sufficient number of comparable properties is available for the analysis. This method works mainly for the market appraisal of condominiums, residential and commercial buildings.


    2. Income approach

    The income approach is particularly suitable to determine the value of rented properties such as apartment buildings and commercial properties. There are three approaches as described by the “Immobilienwertermittlungsverordnung”:


    • The general income approach (§ 17 par. 2, s.1 ImmoWertV)
    • The simplified income approach (§ 17 par. 2, s.2 ImmoWertV)
    • The income approach based on different periodic income (§ 17 par. 3 ImmoWertV)


    We will now have a closer look at the general income approach, which is also called the two-headed income methodology. This name results from the separate valuation of the land and the building.


    2.1. The net value of the building

    The net value of the building is determined as follows:


    a) Calculation of the annual net operating income

    When you deduct the annual net operating expenses from the yearly rental income, you obtain the annual net operating income. The operating expenses include management costs, the risk of vacancy losses, maintenance costs and operating expenses.



    We need to determine the current market value to prepare the sale of an apartment building in Munich. The property produces a yearly rental income of € 100,000. The annual management costs are € 12,000.

    Annual net income = 100.000 € – 12.000 € = 88.000 €



    b) Calculation of the net income share of the building

    The net income share of the building is calculated by deducting the expected return on land value from the annual net operating income.


    With the multiplication of the property interest rate by the land value, you obtain the expected return on land.


    Example (continued)

    Land value of the Munich apartment building = 2.000.000 €, Property interest rate = 2 %

    Expected return on land = 2.000.000 € * 2% = 40.000 €

    Net income share of the building = 88.000 € – 40.000 € = 48.000 €



    c) Calculation of the capitalised net value of the building

    To determine the capitalised net value of the building, we require data on the remaining useful life of the building as well as the property interest rate. With this data, we detect the present value factor from the table in appendix 1 of the ‘Immobilienwertermittlungsverordnung’.


    The capitalised net value of the building is calculated by multiplying the corresponding NPV factor by the net income share of the building.


    Example (continued)

    Property interest rate = 2 %, Remaining useful life = 50 years

    Present value factor = 31,42 (taken from the table in appendix one of the ImmoWertV)

    Capitalised net value of the building = 31,42 * 48.000 € = 1.508.160 €


    2.2. Land value

    We use the reference land values from the official land valuation boards to calculate the current land value.


    Example (continued)

    Calculated land value of the Munich apartment building = 2.000.000 €


    2.3. Net property value

    By adding the capitalised net value of the building and the land value, we obtain the final result, which is the net property value.


    Example (continued)

    Capitalised net value of the building = 1.508.160 € , Land value = 2.000.000 € (see calculation above)

    Net property value of the apartment building in Munich = 1.508.160 € + 2.000.000 € = 3.508.160 €


    Additionally, we need to consider other circumstances which can have an impact on the value. These can either reduce or increase the net property value. For example, a mandatory replacement of the roof truss would reduce the total income value according to the costs for this repair measure.



    The income approach is a vital market appraisal tool which is mainly applied for commercial as well as private rental properties. However, it only brings forward realistic results if the decisive parameters are correct. For example, it is critical to apply the right property interest rate.



    3. The cost approach

    The cost approach is useful for the valuation of individually designed, detached and semi-detached houses which are inhabited by the owner. Due to the unique individuality of the buildings or outdoor facilities, there are usually no suitable real estate properties for the application of the direct price comparison approach. The income approach is also not applicable because the real estate property is not being rented out.


    The cost approach calculates the value of a property by adding the cost of the land and the standard construction costs minus the age depreciation. Making use of the cost approach implies the following steps:


    3.1. Construction costs of the building

    Since the production costs vary greatly depending on the construction quality level, the first step is to precisely detail the standard production costs.


    3.2. Age depreciation

    To find the present property value, we must deduct the age depreciation of the building from the standard production costs. If we were to assume that a building has a life span of 80 years, the linear age reduction would be 1.25 % of the building production costs per year of use.

    3.3. Provisional asset value

    The provisional asset value is calculated by adding the present property value to the land value.


    3.4. Market adjustment

    Until now, we have not taken the location of the property into account. However, the location is crucial for the correct market appraisal. Imagine a single-family home in a rural area with poor infrastructure being valued at the same level as an exclusive located house in Munich’s luxury district Bogenhausen-Herzogpark. This valuation would never reflect reality. Therefore, we will have to apply the corresponding local market adjustment factor from the official land valuation board. With this correction, we arrive at the property market value determined by the cost approach.



    The cost approach is often considered to be the most complex of the three valuation approaches. Critics claim that it does not make sense to determine a property’s value by simply using standard costs of building materials. However, it plays a vital role in market appraisal practice.


    The Bottom Line

    Independent of the reason for which you intend to sell your property: Whether it is to realise a profit, due to a relocation, a divorce, an inheritance or for any other reasons, you must start the process with a detailed and correct market appraisal. Only then it is reasonable to expect a successful property sale.


    If the price of the property to be sold is set both too low or too high as compared to the market value, negative financial consequences will be incurred. Please be aware that if the property’s sale price is set too high in the beginning, the market usually penalises this pricing policy. Why? Potential buyers will observe the various price reductions if the property does not sell. There is a high risk that they become more and more sceptical in this process and think that it is worth waiting for further price reductions. Therefore considerable delays in the sales process tend to occur, and your finally achieved property sale price is at risk of even falling below the actual market value.



    Picture credit: Shutterstock, 275799518, Viktoriya

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