Market Value / Verkehrswert

The Market Value determination for real estate of any kind and size is the essential basis for the property investment assessment, purchase price determination, credit final assessment as well as risk policy and balance sheet decisions.

Content

The Definition of Market Value

Why do you need the Market Value of a property?

Methods of determining Verkehrswert or Market Value

Which methods of value assessment apply?

Who determines the Market Value?

The Definition of Market Value

Market Value – Verkehrswert – Valeur Vénale – Onderhandse verkoopwaarde – Valor de mercado: Although the methods for determining the Market Value differ from one country to another, the Market Value concept is based throughout Europe and beyond on broadly consistent framework conditions, which would be there:

•    The Market Value is the value of a property at the date of valuation which may change at short notice

•    The transaction is carried out on a transparent market after a reasonable marketing period (no tendering procedure with a limited audience)

•    The parties involved act with expertise

•    The transaction is free of personal interests (no sale among relatives, exclusion of internal interests)

•    The sale takes place on a voluntary basis (no compulsory measure)

Why do you need the Market Value of a property?

The Market Value of a property forms the basis for (purchase) pricing for all types of Real Estate transactions and, in connection with the Mortgage Lending Value, the basis for the loan condition for the external financing of the acquisition of Real Estate. As a rule, financial institutions have a Market Value and Mortgage Lending Value report drawn up by a qualified expert as part of the financing request.

Methods of determining the Market Value / Verkehrswert

In contrast to the neighboring European countries, Germany has a specific set of rules for the method of valuation. Although the German Building Regulations (BauGB) has equated the terms "Verkehrswert" and "Market Value" since 2004 in §194, the term "Verkehrswert" for value assessments is more likely to be used in the legal framework of the Building Regulations for compliance reasons with legislation and regulations, while the term "Market Value" is preferred for almost all other value-finding events, e.g. in the financial sector.

The standardized valuation methods are described in the implementing regulation to the BauGB, the "Regulation on the principles for the determination of the Verkehrswert of Real Estate and the data required for the valuation (property value assessment regulation – ImmoWertV 2021), last updated on 1 January 2022. However, ImmoWertV is only to be applied by the expert committees (both in the case of Market Value assessments and in the case of derivation of "data required for the determination of value") and in the assessment of value in connection with the Building Regulations (e.g. in the case of expropriation or transfer procedures) as well.

The "Verkehrswert” determination according to ImmowertV 2021 was standardized very strongly in the valuation estimates (e.g. utilization period of buildings, non recoverable costs) compared to previous guidelines WertV/WertR. Market fluctuations are represented by multiplying the preliminary valuation result, which is largely based on table values, by empirically determined market factors. The assessment of the Market Value according to ImmoWertV 2021 is therefore rarely and reluctantly applied consistently by experts in the context of evaluations outside the scope of the BauGB.

The financial industry prefers the "Market Value” determination in the valuation reports for financing purposes, which in terms of valuation methods is principally based on the basic methods of the BauGB/ImmoWertV, with the difference that individual and actual market parameters are applied directly in the valuation approach. This also guarantees to model the real Cash Flow of a property for the assessment of the debt service capacity (repayment and interest) from its rental income.

Which methods of value assesment apply?

In Germany, the Market Values of Real Estate are usually determined by means of three (standardized) valuation methods – applied individually or in combination. The property value is determined by the characteristics of the property and its market environment, and not by which method of valuation is used. If applied correctly, all valuation methods should lead to the same valuation result. "Valuation" primarily means "comparison" of market parameters. Therefore, the respective valuation method is used for which the most meaningful comparison figures (resp. value parameters) are available for the property-specific valuation.

The type of property is therefore decisive for the choice of the valuation procedure.  

• The Comparative Value calculation is used to determine the value for (undeveloped or non built-up) land, condominiums and, where applicable, terraced houses and, more rarely, detached single-family houses.
• The Depreciated Replacement Cost Valuation is mainly used in the valuation of (individual) single-family houses and for commercial properties with severely restricted third-party use possibilities or technical industrial plants.
• The determination of the Income Value is the standard procedure for determining the value of all income-generating types of real estate, such as in floor housing construction and commercial properties in the retail, office and administration, hotel/restaurants and nursing home sector, in warehousing/logistics use, for agricultural premises as well as for third-party useable buildings of the manufacturing industry.  
• The internationally used, non-standardized Discounted Cash Flow method (DCF), as a special form of Income Value, is preferred for properties whose earnings situation is subject to strong fluctuations in the foreseeable future. Thus, Cash Flows can be mapped, which result, for example, from ongoing renovation expenses, changes in the tenant structure or successive sales of individual ownership units as well.

Who determines the Market Value?

Various laws and regulations define the conditions for the suitability of experts for the determination of Market Values (and safety values, such as the lending value) for the real estate financing business.

At the European level, the requirements of the European Banking Authority's "Guidelines on Loan Origination & Monitoring" (EBA Guidelines) regulate in detail the quality requirements and the compliance requirements for assessors involved in the assessment of real estate collateral for the financing business.  According to TZ 231 “Institutions should ensure that a valuer carrying out the valuation or revaluation tasks:

a. is professionally competent and meets any national or international requirements and accepted professional standards that apply to the valuer or for carrying out a particular valuation assignment;

b.  has the appropriate technical skills and experience to perform the assignment;

c.   has the necessary knowledge, i.e. knowledge of the subject of the valuation, the relevant property market and the purpose of the valuation;

d. is independent from the credit decision process.“

For the German financing business, these requirements have been adapted in the "Minimum Requirements for Risk Management (MaRisk) and, especially for the financing business of Pfandbrief Banks in the German Pfandbrief Act (PfandBG), with its implementing regulation, the " Regulation on the Determination of the Mortgage Lending Values of Properties in accordance with § 16 pars. 1 and 2 of the Pfandbrief Act" (BelWertV). According to this „The valuer must, in respect of his vocational training and professional activity, possess special knowledge and experience in the field of property valuation; persons who have been appointed or certified by a government body, a state-approved body or a body accredited according to the standard DIN EN ISO/IEC 17024 as appraiser or valuer for the valuation of properties are assumed to possess such qualifications.“

As a Real Estate Valuation company, KENSTONE GmbH has the quality seal "Approved by HypZert". More than 60 experts from KENSTONE GmbH at 8 locations in Germany are HypZert personnel certified according to DIN EN ISO/IEC 17024. Many of them are also members of the Royal Institution of Chartered Surveyors (RICS) or Member of the Appraisal Institute (MAI). We thus fulfill all the above requirements. With our extensive expertise in determining Market Value and Mortgage Lending Value, we are happy to assist you in all valuation questions