Energy Efficiency And Property Valuation Economics Essay

Property rating is required and executed for different intents, such as gross revenues minutess, mortgage loaning, belongings insurance, periodic fiscal coverage of concern entities, company revenue enhancement or revenue enhancement of private individuals and is addressed to residential and commercial edifices. It is a procedure finding the value of a existent estate plus. This procedure is executed by the belongings valuer, a individual who meets the necessary making demands ( academic makings, proficient competency and experience as belongings valuer ) , has the required cognition of the specific market every bit good as the necessary accomplishments to transport out such rating ( RICS 2011a, VS 1.5 and 1.6 ) . The belongings valuer must execute in conformity with Valuation Standards and be nonsubjective ( RICS 2011a, VS 1.8 ) . The function of the belongings valuer is to detect how market participants, such as investors, developers and terminal users, behave on the market and whether tendencies can be indicated, which will act upon their operations and belongings value in general. Sustainability already established itself in the society and may be considered such a tendency. Specific features like legislative facets and most of all energy efficiency may act upon belongings rating consequences. However, in order to execute belongings rating sufficient acquisition and equal supply of relevant informations is of great significance to the belongings valuer ( Gunkel 2012 ) .

Traditional belongings rating attacks theoretically have the possible to capture and reflect energy efficient edifice qualities. Lower operating costs and a healthy indoor environment cut down vacancy and therefore lower the hazard of rental income losingss in office edifices. In practice, nevertheless, there is merely small constructing specific informations available and the clip for appraisals is limited. Therefore, belongings valuers carry out their rating based on by and large applicable parametric quantities and consciously do non take specific facets into history. This process is right every bit long as the valuer refers to the discounted facets in the rating study, which paperss the full procedure of the value appraisal. This is being done in the rating study under the subdivision called “ Description of Building ” . In the instance that a elaborate proficient expertness is required for the rating study, an expert will be instructed to put to death a proficient expertness. Mention is so made to the expert ‘s study in the rating study. Property valuers have expertness based on economic and legal background, and have thorough cognition of the existent estate market. One of the most of import parametric quantities for belongings value estimates is the accomplishable rental income. Other factors of important influence on belongings value are location and the belongings ‘s type of usage. The benchmarks frequently used in standard rating procedures are based on analysis of comparable grounds and make non adequately reflect energy efficiency and other sustainability related edifice qualities. In order to reflect energy efficiency in belongings rating processes more informations on the energetic edifice quality must go apparent and available. The improved handiness of edifice informations is the demand to the consideration of energy efficiency within the rating procedure ( Bammer and Brunner 2012, p. 12 ) .

Over the last old ages a important figure of voluntary enfranchisement systems for mensurating and measuring green edifices was developed and they established themselves all over the universe. Most of these systems are based on national criterions and do international comparings of energy efficiency within edifices hard.

The turning understanding and consciousness of the effects, which edifices have on the environment convinced national authoritiess and the European Union to present obligatory ordinances, which encourage the decrease of CO2-emissions generated through energy usage in edifices. The demand for an internationally comparable evaluation strategy led to the acceptance of Energy Performance Certificates ( EPC ‘s ) into national statute laws within the member provinces of the European Union. These certifications can be used as an index for the energy efficiency of edifices. In the EU, due to the duty to subject Energy Performance Certificates ( EPC ) in instance of gross revenues, new physique and rental of edifices and constructing units, EPC ‘s will go available for a great figure of edifices in the hereafter. This will at least provide transparence and information on the energetic quality of edifices. Otherwise, in non-European states, where compulsory enfranchisement does non be, the increasing demand for voluntary enfranchisement systems will ensue in a greater handiness of necessary information ( Bammer and Brunner 2012, p. 12 and Bienert et Al. 2010a ) .

In this subdivision, the writer will depict the most normally used international rating attacks for income bring forthing commercial existent estate. Furthermore, the writer will exemplify the theoretical linkage of energy efficiency features to market value and the cardinal issues to the integrating and contemplation of energy efficiency within belongings rating pattern.

The Value Terminology

Within the corporate sector economic success is progressively considered as inextricably linked with environmental and societal public presentation. Corporate organisations progressively integrate Corporate Social Responsibility ( CSR ) initiatives into their daily concern operations and interactions with employees, clients, consumers and providers. This perceptual experience is now besides being assigned to existent estate.

Presently, the market and therefore the apprehension of value is in the procedure of passage. The consideration of lone economic factors is non sufficient any longer to specify the value of a belongings. The value of a belongings is dependent on the extent to which a belongings contributes to the creative activity and protection of socio-cultural and environmental values. The apprehension of the interaction and/or mutuality of these facets and their integrating into belongings rating procedures are now one of the major challenges faced in the existent estate industry. Since, investors and residents are progressively paying attending to SRI/RPI and CSR, and see energy efficiency as of import factors when doing investing and leasing determinations, the grade to which these facets affect belongings value is progressively deriving in importance ( Lorenz 2008, p. 52 ) .

The green value is defined by RICS ( 2005 ) as the “ added value gettable by green edifices on the market ” ( p. 2 ) when compared to conventional edifices. Furr et Al. ( 2009 ) add that the green premium chiefly consequences from advanced architectural design and engineerings ( p. 104 ) . Green value fundamentally represents the value-based advantage, or premium, which is determined by the resident ‘s willingness to pay for “ green ” features in a peculiar market when compared to an indistinguishable conventional edifice in the same market. However, this green value is non yet captured by traditional rating attacks. This is the instance as belongings “ valuers do non do the market ” ( Huttler et al. 2011, p. 1280 ) ; they do non act upon the market status but simply reflect the ascertained willingness to pay on the market. The purpose is to reflect the existent market status and non merely presume that environmental friendly edifices must be worth more than conventional edifices. Property valuers require market-derived information in order to suitably value a belongings. They do non gauge the value of a belongings based on premises and what might go on in the hereafter. In theory, green value can be considered as an built-in constituent of market value. In pattern, nevertheless, there is non adequate important market grounds on the green premium and belongings valuers are non yet able to include such green values/premiums into standard assessment attacks.

Traditional rating attacks estimate market value, which the International Valuation Standards Committee ( IVSC ) every bit good as The European Group of Valuers ‘ Associations ( TEGoVA ) define on international degree as

“ [ T ] he estimated sum for which the plus should interchange on the rating day of the month between a willing purchaser and a willing marketer in an arm ‘s length dealing after proper selling wherein the parties had each acted knowledgeably, providentially and without irresistible impulse. ” ( TEGoVA 2012, p. 15 and IVSC 2000, p. 96 )

Market value is the most common footing in belongings rating ( RICS 2008b ) . It is the belongings valuer ‘s nonsubjective severally market derived sentiment of the market monetary value, which could be obtained if the belongings was sold on the market at a specific point in clip under the specific market conditions at that clip. This is of importance as market conditions may alter. Consequently, estimated market value is inaccurate at a clip other than the rating day of the month. The determined market value reflects merely the market status on the rating day of the month and is neither past nor future oriented. Furthermore, the belongings shall merchandise between a prospective purchaser and a prospective marketer. Thereby, the willing purchaser is non “ overeager ” to buy the belongings at a monetary value higher than set by the market and the willing marketer wants to sell the belongings for the best monetary value achievable on the market. The exchange of the belongings shall be executed among unrelated parties ( parties with no particular relationship ) , where each party acts independently. Prior to the rating day of the month, the belongings shall be listed on the market for a sufficient period of clip for marketing intent. A sensible selling clip, or exposure clip, is of import for the belongings to pull an equal figure of possible purchasers. Finally, the belongings will interchange on the market under the status that both parties are provided with relevant information on the edifice ; its features and its “ existent and possible usage ” . Another demand is that both parties shall be motivated to transport out the dealing but non forced to finish the trade ( IVSC 2000, pp. 97-98 ) .

It is of import to advert that market value and monetary value should non be understood synonymously. Market value estimated based on elaborate analysis of informations derived from the market, and is “ impersonal as of between purchaser and marketer ” ( TEGoVA 2012, p.18 ) . The ascertained belongings ‘s gross revenues monetary value, nevertheless, does non needfully stand for the estimated market value. Price represents the existent sum paid for a specific belongings under the fortunes, which surround the dealing between peculiar purchaser and marketer. Market value represents an sentiment of the monetary value, which in all chance could be achieved if the belongings was traveling to be sold on the market ( Lorenz 2007, p. 159 ) . The existent monetary value, which the peculiar purchaser wages and the peculiar marketer accepts, may be influenced by specific “ non-market conditions ” ( IVSC 2000, p. 116 ) . It can be influenced by particular conditions like economic downturn/crisis, particular relationships between purchaser and marketer, emotional fond regard to the capable belongings or a mandatory state of affairs, which requires selling the belongings even at a monetary value below market value. Thus, a synonymous usage of market value and monetary value nomenclatures appears to be wrong.

Harmonizing to RICS Valuation Standard ( 2008b ) , belongings valuers may be lawfully instructed to offer and execute a rating based on standards other than those required for market value. In this instance, the appropriate value will be other than market value. In contrast to market value, or “ value-in-exchange ” , which is based on nonsubjective standards merely ( IVSC 2000, p. 95 ) , the investing value/worth, or “ value-in-use ” , describes a belongings ‘s value to the single investor or investor group for specified investing aims ( IVSC 2000a, p. 110 ) . Harmonizing to Bienert et Al. ( 2011 ) investing value is a subjective appraisal of value instead than an nonsubjective appraisal. It is the peculiar investor ‘s sentiment of the “ capital amount ” , which he would accept to pass for the assortment of benefits generated by the investing belongings ( p.11 ) . Thereby, the belongings valuer will hold to see subjective standards, or client specific standards, in order to gauge the peculiar belongings ‘s worth. Different investors may hold different rates of revenue enhancement, different abilities of raising finance, different position of hazard or a “ mark rate of return ” , which differs from the common rate of return on the market ( RICS 2008b, p. 47 ) . Such differences may so take to different perceptual experiences of the investing belongings. The worth of an plus is a belongings ‘s value to a specific investor mentioning to the benefits obtained by the belongings investing against a peculiar investor ‘s standards ( Baum, Mackmin and Nunnington 2011 ) . Investment value represents the present value of a belongings ‘s future hard currency flow, which is expected to ensue from an income bring forthing belongings. It regards to what the belongings investing is able to gain instead than what a peculiar party may obtain from the belongings ‘s false exchange on the market ( RICS 2008b, p. 56 ) .

The distinction of the footings market value and investing value/worth is necessary. These footings shall non be used synonymously, as value is the footing of belongings rating ( Lorenz 2007 ) . Consequently, for the appraisal of belongings value it is necessary to be cognizant of these different definitions in order to vouch the application of the appropriate rating.

Finally, “ cost is non value ” and therefore the excess costs of “ green ” building or “ green ” retrofit of bing edifices do non correlate with the value of a belongings. Two indistinguishable “ green ” belongingss with indistinguishable building costs and the same degree of enfranchisement may be valued otherwise in two different markets. This is the instance as the willingness to pay for the same green characteristic may differ significantly among markets ( Huttler et al. 2011, p. 1280 ) . In some markets, energy efficiency may add value and in other markets non. For illustration, photovoltaic panels may be valued higher in markets with high electricity costs than in markets with low electricity monetary values.

Energy Performance Certificate ( EPC ) for Commercial Buildings

Globally, a important figure of voluntary enfranchisement systems has been developed to advance energy efficiency within the edifice industry. Throughout the EU energy efficiency in edifices is chiefly driven by rigorous ordinances. Energy efficient edifices within European member provinces are those, which achieve a good energy evaluation under the compulsory Energy Performance Certificate. Thereby, edifices are rated on a graduated table from “ A ” ( A++ , A+ ) to “ G ” , whereas “ A ” represents extremely energy efficient edifices and “ G ” represents inefficient edifices. These compulsory certifications allow cross-border comparings but can non be straight integrated into belongings rating as national EPC ‘s differ from each other. This may be due to the fluctuations among national policies and statute law ( e.g. different mark values ) or merely different climes. Harmonizing to BPIE ( 2010 ) rating and monitoring of EPC-data still represents a hurdle, as most EU member provinces do non possess a cardinal database comprising of issued EPC ‘s ( p. 16 ) . A database, nevertheless, would let for aggregation of informations in respect to the figure of issued certifications, “ energy public presentation degree and recommended steps ” . Data gettable from EPC ‘s which can be straight compared is non or merely to a limited grade bing. For the intent of its integrating into belongings rating, EPC-data involves transmutation and accommodation. Consequently, its integrating into belongings rating pattern requires engagement of EPC experts in the belongings rating procedure and a unvarying format for EPC ‘s ( Bienert et al. 2011a, pp. 15-16 ) .

Since EPC ‘s are obligatory in the EU they will go progressively available for new physiques and bing edifices in the hereafter. Energy cardinal public presentation indexs will go easier gettable, ensuing in a higher degree of transparence. This in bend will carry investors and residents to compare energy steps to a higher grade, as is presently the instance. Investors, developers and terminal users will hold to take energy public presentation of edifices and other energy related facets into history and integrate those into decision-making procedures. The market is already in passage but will alter to a higher grade in the hereafter. Once dependable benchmarks become available, such a alteration on the market will take to premiums, or higher market values, for energy efficient edifices severally will ensue in price reductions for conventional edifices ( Bienert et al. 2011a, p. 17 ) .

For commercial edifices EPC ‘s include edifice specific information ( e.g. edifice type, twelvemonth of building, utile country etc. ) , information related to proficient edifice systems ( e.g. warming, airing, H2O warming, illuming etc. ) , parameter associated with heat demand and electricity ingestion for air conditioning, airing, lifts etc. , mention values of other edifices and accounts of of import footings. Additionally, one page refers to modernisation steps recommended for energy efficiency betterments.

Calculation methods non merely differ among EU member provinces, but besides may change among federal provinces. However, the most of import energy cardinal public presentation index of every EPC is ever the specific warming energy demand expressed in kWh/sq.m. per twelvemonth ( Heizwarmebedarf ) . This cardinal public presentation index is the most normally used comparable value bespeaking the thermic quality of the edifice ‘s envelope. This parametric quantity states how much energy a edifice would necessitate for heating the gross floor country on an one-year footing per sq.m. in order to maintain indoor temperature at 20 A°C in a referential clime and non the existent location. It does non mention to the existent energy ingestion and therefore does non take existent user-behavior into history. Therefore, the specific warming energy demand is really good suited for comparings of edifice ‘s thermic quality and could be used as a cardinal rating factor for belongings rating. As it is the existent comparable parametric quantity, it is placed following to the colored graduated table in the EPC ( ASUE 2009, and ) .

Benefits of EPC certified Buildings

Most published surveies indicate that edifices with decreased production of CO2 emanations and improved energy efficiency consequence in higher costs of building, higher rental rates, gross revenues monetary values, tenancy rates and rates of return. These surveies, nevertheless, are based on voluntary enfranchisement systems and may hence be driven by factors like image and selling. In contrast, the EU Energy Performance Certificate ( EPC ) is considered an independent rating index, as it is compulsory for all edifices within the European Union ( IPD 2011, p. 6 ) . In contrast to green and sustainable edifice certifications such as DGNB or LEED, EU Energy Performance Certificates focus merely on CO2 emanation and energy demand.

Up to now merely really few surveies have been carried out on the impact of Energy Performance Certificates on the public presentation of commercial existent estate. In 2011 the Investment Property Databank ( IPD ) carried out a survey on Property Performance and Energy Efficiency in Germany. For this intent, 193 commercial belongingss were analyzed over a clip period of 3 old ages. EPC ‘s represent the foundation of this survey and therefore the information on energy demand/consumption used for this survey is derived from EPC ‘s. Buildings are classified into energy-rating classs from A to G. Thereby, edifices labeled with A, B and C are considered energy efficient, while G, F and E are understood as energy inefficient.

Table: Energy Rating Classs

Energy Rating Category

Min. kWh/sq.m. per twelvemonth

Max. kWh/sq.m. per twelvemonth

A ( extremely efficient )



& gt ; 50



& gt ; 100



& gt ; 150



& gt ; 200



& gt ; 250


G ( least efficient )

& gt ; 300

Beginning: Writer ‘s Illustration after ( IPD 2011, p. 7 )

The survey findings indicate that in Germany commercial edifices with lower energy ingestion tend to accomplish lower vacancy and higher rental rates. Buildings certified under the energy-rating class A, B, and C achieved lower vacancy rates than inefficient edifices labeled with D, E, F and G. Non-recoverable operating disbursals for edifices rated under classs A, B and C decreased by around 50 % over the clip period of 2 old ages and are lower than for edifices labeled with D, E and F ( IPD 2011 ) . Furthermore, Kok and Jennen ( 2012 ) analyze the impact of energy labels on office rents. They analyzed 1100 renting dealing in the Netherlands over a clip period of 5 old ages and the consequences show that less efficient edifices categorized as D, E, F and G have rental degrees of 6.5 % lower when compared to edifices labeled with A, B and C. These consequences tend to corroborate survey findings from the United States, which are based on voluntary enfranchisement systems.

International Valuation Approaches

The existent estate market is already in passage and systematic attacks for the consideration of specific constructing qualities within belongings rating pattern become progressively needed. As of 2012, the belongings rating pattern on international degree makes usage of three standard rating attacks for market value estimations. Those attacks are represented by the gross revenues comparing attack, cost attack and income attack. For the intent of valuing income-producing belongingss, the writer will explicate the gross revenues comparing and income attack in more item.

Gross saless Comparison Approach

Within belongings rating pattern, the gross revenues comparing attack, or comparative attack, represents the most often applied attack to gauge market value for vacant or occupied secret plans of land ( Bienert et al. 2011, p. 14 ) . This attack is appropriate for every type of existent estate where adequate and dependable belongings dealing grounds is available. When there is adequate informations on similar gross revenues available, this attack is considered the “ most direct and systematic attack ” ( IVSC 2007a, p. 6.1.6 ) for market value estimates. Its application is primary based on “ comparative analysis ” , which represents the nucleus of belongings rating. In order to deduce belongings value, the belongings under rating ( capable belongings ) is compared to recently sold indistinguishable belongingss ( comparables ) . The belongings valuer investigates the available informations on comparable gross revenues in the market place in order to bespeak the value for the belongings under rating. Due to comparings of belongingss and gross revenues minutess, the market value to be estimated for the belongings under rating is connected to monetary values of similar belongingss. The accent is thereby on value relevant similarities and unsimilarities between similar belongingss ( Lorenz and Lutzkendorf 2008 ) .

However, critics express vacillation about the application of the gross revenues comparison attack for the intent of valuing developed belongingss. In order for this attack to be of best usage, a sufficient figure of gross revenues monetary values of comparables must be available. The comparables must be really similar to the belongings, which is capable to rating. Furthermore, it is to guarantee that all comparable gross revenues minutess were made within a narrow clip frame to the day of the month of rating. All these demands greatly cut down the available sum of perchance comparable belongingss. Therefore, this attack is chiefly used for valuing vacant land and places like single-family detached houses or owner-occupied flats, which are often sold and easy comparable. For the intent of valuing developed belongingss with the gross revenues comparing attack, the belongings valuer makes usage of elements of comparing ( Simon, Reinhold, Simon 2005 and Baum, Mackmin and Nunnington 2012 ) .

The application of the comparing method, by and large requires the belongings valuer to continue as follows ( Lorenz and Lutzkendorf 2008 ) :

The belongings valuer defines value-related elements of comparing. Those elements represent belongings and dealing features, which are responsible for fluctuations among belongings monetary values. Harmonizing to Johnson ( 2012 ) elements of comparing are


Physical features ( e.g. design, age, size, comfortss, status and building quality or edifice betterments etc. ) ,

Economic features ( e.g. fluctuations in income, vacancy, disbursals and net runing income ) ,

Market status ( clip ) ( e.g. market conditions may alter with clip and so may alter the Market Price. The monetary value may keep steady, rise or diminution within the present clip and the clip of the comparable sale ) and

Condition of sale ( e.g. gross revenues between family-members or due to mandatory state of affairss ( bankruptcy ) may ensue in monetary values to be affected by non-market conditions. If this is the instance, probe of the dealing is required in order to province whether or non the status environing the dealing affected the monetary value ) .

Once the elements of comparing have been identified, the belongings valuer compares the features and elements of every comparable to the features and elements of the belongings under rating. As no two belongingss are indistinguishable, the differentiation in every component of comparing is measured in order to verify a sensible accommodation and aline the gross revenues monetary values of comparables. Adjustments for the assorted differences between the comparable and the belongings under rating can be established in either pecuniary unit ( e.g. Euro ) or per centum. Harmonizing to Williams ( 2004 ) , the belongings of comparing is considered a known dealing while the belongings under rating is considered unknown. Adjustments are derived by taking the comparable belongings ( known dealing ) to an equal place of the belongings under rating ( unknown dealing ) . In the instance that the comparable is “ qualitatively superior ” to the capable belongings, a negative accommodation will be performed in order to obtain an equal degree between the comparable and the capable belongings. On the contrary, a positive accommodation is performed when the degree of the comparable belongings is “ qualitative inferior ” ( Lorenz and Lutzkendorf 2008, p. 503 ) to the belongings being valued. Thereby, the market states whether an component is superior or inferior when compared to the capable belongings. In mention to William ( 2004 ) , a corner location is of positive influence for a commercial belongings as it is associated with higher exposure and handiness. In this instance, a corner location may hold a higher monetary value than an interior secret plan. On the contrary, a corner secret plan of land may be of negative influence for a single-family degage place as it may be associated with more traffic, or less privateness, and be of less attraction than an interior secret plan of land. In this instance, a corner location may hold a lower monetary value. Furthermore, accommodations can be taken from monetary value differences between two comparables, which are the same except for a individual characteristic. In this instance, the value of this one characteristic will be excluded and most likely consequence in an indistinguishable adjusted gross revenues monetary value. The grade, to which accommodations are sensible for a belongings is based on the valuer ‘s experience. This is the instance as the same belongings feature may be valued to another grade in different countries.

Figure 25: General Gross saless Comparison Approach

Gross saless Monetary values on Market Level of Comparable Properties


( reflecting differences between sold belongingss and belongings to value )

Market Value

( based on comparables )



Beginning: Writer ‘s Illustration after ( Bienert et al. 2011, p. 13 )

Income related Approachs

Income bring forthing belongingss like office edifices bring grosss to proprietors in signifier of income. Such belongingss are primary bought as an investing and their capacity to bring forth income represents a important component act uponing value. Building location and status every bit good as economic state of affairs influence the possible income produced by the belongings. All these factors have consequence on the manner the market positions such belongingss and therefore the belongings ‘s market value.

The income-oriented attack is applied to belongingss, for which there is an active renter and investing market. As such belongingss are by and large purchased as an investing and are associated with the exchange of capital today for future benefits, the income attack is used for gauging the present value of future income. When edifices like office edifices rent often, it is possible to garner all relevant informations for market value estimates. There is a sufficient sum of gross revenues informations available, which enables hazard rates every bit good as capitalisation rates to be established. This is of importance, as gauging market value with the income attack requires such rates.

As the income attack is the most appropriate attack to value market value of income bring forthing commercial existent estate, the writer will look into income related attacks in more item in order to happen the most value act uponing parametric quantities. Although international standard income related attacks differ merely to some extent from each other, for the intent of a theoretical integrating of energy efficiency aspects into the pattern of belongings rating the writer will work out these little differences by comparing the income attack from the United States and the investing method from the United Kingdom to the German ‘Ertragswertverfahren ‘ .

‘Ertragswertverfahren ‘ in Germany

In Germany, market value of income bring forthing belongingss is appraised with the ‘Ertragswertverfahren ‘ , which is regulated in the German Federal Real Estate Valuation Ordinance known as ImmoWertV ( Mutze, Senff and Moller 2012, p. 62 ) . The income method is guided in A§ 17 – 20 ImmoWertV, harmonizing to which the capitalized income value is to be computed with the standard income attacks called general and simplified ‘Ertragswertvrfahren ‘ . The general income method divides net income into a constituent assigned to the value of land and a constituent assigned to the value of edifice. This separation is being applied, as it is understood that land can be used infinite while a physical construction is of limited usage, intending that it has a staying economic life over which it will be economically productive. In other words, edifices depreciate and loose in value over clip ( see 5.3.2 ) while land does non deprecate and accordingly is assumed to hold an limitless economic life. At the terminal of the rating procedure, value of land and value of edifice are added together in order to get at the capable belongings ‘s market value. On the other manus, there is the simplified ‘Ertragswertverfahren ‘ without direct consideration of land value. Thereby, net income is capitalized at an appropriate “ belongings output ” called ‘Liegenschaftszinssatz ‘ with regard to the edifice ‘s staying economic life. Just like within the general ‘Ertragswertverfahren ‘ , value of land is estimated individually from constructing value ( Kohling 2011, p. 60 ) but becomes merely portion of the simplified ‘Ertragswertverfahren ‘ in signifier of a discounted land value ( A§ 17 ( 2 ) 2 ImmoWertV ) . However, for edifices with a comparative long staying economic life ( more than 50 old ages ) , the discounted land value can be omitted ( Zei?ler. M. , personal electronic mail to writer, December 4, 2012 ) . This is indistinguishable to UK and USA rating pattern, where edifices are assumed to hold an limitless life-time. As both, the general and simplified ‘Ertragswertverfahren ‘ lead to the same consequence, the simplified method will be farther investigated. This method is the most similar when compared to the traditional income related attacks from the UK and USA. In order to gauge market value based on income with the simplified ‘Ertragswertverfahren ‘ , the belongings valuer will continue as illustrated below.

Figure 26: The simplified ‘Ertragswertverfahren ‘ Methodology

Income Value

( staying life-time )

Income Value

Discounted Land Value

Annual Gross Income

Annual Net Income

Annual non-recoverable Operating Expenses




Vervielfaltiger ( Multiplier )



Market Value

( based on income )





Beginning: Writer ‘s Illustration after ( Bienert et al. 2011, p. 32 )

Value of Land

The value of land is one of five value-influencing parametric quantities described in this subdivision. It is by and large estimated based on the rules of the comparative attack and informations from the local commission of rating experts ( Gutachterausschuss ) . Once the market monetary value per square metre for the secret plan of land is estimated as if vacant, the belongings valuer multiplies market monetary value per square metre by entire square metre of the secret plan to get at the value of land ( Bodenwert ) . At the terminal of a edifice ‘s staying economic life merely land value remains. For the intent of farther income value estimations, the value of land is multiplied with a present value factor ( Barwertfaktor fur die Abzinsung ) , which can be derived from Annex 2 to A§ 20 ImmoWertV. This present value factor is dependent on ‘Liegenschaftszinssatz ‘ and the edifice ‘s staying economic life. The ensuing sum represents “ the present value of land for the staying economic life of the edifice ” , besides called “ discounted land value ” ( Bienert et al. 2011, p. 31 ) . It is added to income value of the staying life-time of the edifice in order to get at income value of the belongings. The higher the value of land, the higher the discounted land value and accordingly the resulting income value of a belongings. For market value estimations of belongingss with a staying economic life of more than 50 old ages, discounted land value is no longer taken into history and can be omitted ( Zei?ler. M. , personal electronic mail to writer, December 4, 2012 and WertR 2006 3.5 B ) . This is the instance as the sum of land value ( Bodenwertanteil ) decreases with increasing staying life-time of the edifice ( Menges 2011 ) .

Gross Income

After land value has been determined for ciphering discounted land value, the 2nd measure towards market value is the appraisal of the capitalized income value of the edifice. Therefore, gross income ( Rohertrag ) is to be determined.

Under the “ Regulation on the Determination of Value ” ( WertV ) , which was replaced by ImmoWertV in 2010, gross income was defined as the consequence from all sustainably gettable grosss ( in peculiar rental income from rental countries, parking infinite, garages etc. ) With the debut of the ImmoWertV in 2010, the definition of gross income does no longer literally refer to “ sustainable ” grosss but footings grosss as “ market based ” ( A§ 18 ( 2 ) ImmoWertV ) . This leaves room for misunderstandings as “ marked based rent ” ( marktubliche Miete ) is non farther defined in the ImmoWertV and could be confused with market rent, which is understood as the mean rent gettable on the twenty-four hours of rating if the topic belongings was to be re-let under a new contract to a new renter ( Immobilien Zeitung 2010 ) . This conceptual alteration, nevertheless, does non stand for a alteration in methodological analysis and “ market based ” rent or/and rental income remain what they have been earlier, viz. sustainable ( Sprengnetter and Kierig 2010, p. 154 ) .

Consequently, the ‘Ertragswertverfahren ‘ is based on the sustainably gettable net rent. While net rent is defined as the rent excepting renters ‘ operating disbursals, “ sustainably gettable rent ” or “ sustainable net rental income ” refers to the rent, which is oriented on the local market. Thereby, the rental income from the belongings is limited to the sustainably gettable net rental income, which excludes overrenting and therefore excess hard currency flow. The needed “ sustainability ” purposes to forestall that rent, which for a limited period of clip is set above the degree of sustainability, is integrated as gross income into the income value computation ( Ertragswertberechnung ) . Sustainable net income can be expected as dependable and changeless over the long term. The accomplishable grosss are termed “ sustainable ” as they are assumed to remain stable in the hereafter every bit long as the rental contract is long-run. The grosss fluxing to the proprietor shall be invariably achieved over the staying economic life. If on the twenty-four hours of rating contract rent of a commercial belongings differs from sustainable rent, contract rent is to be integrated into the ‘Ertragswertverfahren ‘ in signifier of surcharges or price reductions. Within the ‘Ertragswertverfahren ‘ object-specific accommodations can be considered under the class called accommodations ( Figure 27 ) . Surcharges are performed for so called overrented belongingss, intending belongingss with contract rents set above sustainable rent. Discounts are preformed for belongingss where contract rent is set below sustainable rent. Such belongingss are referred to as underrented. Furthermore, it is of import to advert that gross income is estimated on the premise of a to the full rented belongings, intending that income from infinite which is non let at the twenty-four hours of rating is taken into history as if occupied every bit long as this infinite is by and large available for renting ( Menges 2011 and TEGoVA 2010 ) .

As rental rates charged by the proprietor non needfully must follow with rental rates in the current market topographic point, rent is estimated based on local market-data and current rental information. The estimated sustainable net rent per square metre is multiplied by the rentable country and per annum in order to get at the one-year gross income. Accurate estimations of rental income and rentable country are of important importance as these parametric quantities represent the foundation for the income value of a belongings. Gross income is thereby one of the most of import value act uponing parametric quantities within the ‘Ertragswertverfahren ‘ ( Zei?ler 2002 ) .

Non-recoverable Operating Expenses

Operating disbursals are outgos, which incur on a regular basis and are necessary to keep the belongings in order to go on the coevals of income. Non-recoverable Operating disbursals are disbursals borne by the proprietor. These disbursals are by and large non passed over to the renter. They are deducted from the one-year gross income in order to get at the one-year net income ( A§ 18 ( 1 ) ImmoWertV ) . Just like for gross income estimations, the facet of sustainability is taken into history in respect to operating disbursals. Consequently, runing disbursals shall go on to incur at their degree in the hereafter for the staying life-time of the edifice. These costs can either be assessed as costs really incurred or, if no information on really incurred costs are available, runing disbursals can be assessed on the footing of experience values ( Menges 2011, p. 49 ) . In Germany, runing disbursals chiefly consist of the undermentioned cost:

Management costs under A§ 19 ( 2 ) 1 ImmoWertV encompass costs required for the intent of pull offing the belongings. They consist of costs for labor and installations, supervising, the value of the proprietor ‘s personal part to disposal and costs of carry oning concern ( disposal of a concern ) .

Management costs can be assessed either in Euro per square metre of useable country, as absolute value per managed unit or as per centum of the one-year gross income. Factors act uponing direction costs are the size of belongings and the figure of rental units ( Zei?ler 2002 and 2006/2007 ) . In respect to the “ German Regulation on the Determination of the Mortgage Lending Value ” ( BelWertV ) ( TEGoVA 2010, p. 4 ) , for commercial belongingss direction costs can be assessed at a rate between 1 – 3 % of the one-year gross income ( Smola 2012, p. 197 ) or between 1.50 – 3 Euros per square metre of useable country on a annual footing ( Zei?ler 2006/2007 ) . Thereby, it is the per centum figure that is most normally used for commercial existent estate rating.

Care costs under A§ 19 ( 2 ) 2 ImmoWertV are the costs required to keep the intended usage of the construction over its staying life-time in position of wear and tear, aging and enduring. These costs are assessed under consideration of the belongings ‘s structural status, equipment of the edifice ( e.g. Windowss, electrical- , cardinal heating- and healthful installings ) and age ( Zei?ler 2006/2007 ) . Care costs cover a edifice ‘s upkeep and regular fix including replacings. However, they should non be confused with renovation severally modernisation, which is likely applied for the intent of increasing the quality of the structural status ( province of fix ) . Care costs are supposed to guarantee the belongings ‘s earning capacity and profitableness ( Menges 2011, p. 50 ) .

In mention to BelWertV, care costs for commercial belongingss are assessed on the footing of building costs[ 1 ]per square metre useable country. Thus, for commercial belongingss with building costs higher than 500,00 Euros per square metre, care costs can be assessed at a rate between 0.8 – 1.2 % . High-quality office edifices with building costs higher than 2000,00 Euros per square metre may be assessed at a rate between 0.4 – 1 % . In general, the lower rate refers to newer edifices and the higher rate is considered as appropriate for older edifices ( Smola 2012, p. 197 ) . This is the instance, as older edifices most likely require more care than newer edifices and are associated with higher costs of care. Care costs are dependent on contractual understandings, age, status, size and equipment of the physical construction, design, type of usage and location ( Menges 2011, p. 50 ) .

Rent aggregation loss is defined under A§ 19 ( 2 ) 3 ImmoWertV as the coverage of rental income losingss due to bad rents and vacancy. Rent aggregation loss besides serves the intent of covering costs for possible prosecution of payment, cancellation of rental contracts or eviction.

The chance of income loss to happen is extremely dependent on vacancy and the creditworthiness of renters. On the one manus, income losingss may originate from renter ‘s non-payments. On the other manus, income losingss may happen from vacancy due to alter of renters, altering market conditions or functional obsolescence. While vacancies due to alter of renters ( tenant turnover ) normally lead to regular but merely short vacancy periods, altering market conditions largely result in rentable countries non allowing in the long-run. Those two types of vacancy are dependent on the belongings ‘s location and its possible for alternate usage ( Zei?ler 2006/2007 ) . This is true, as the more attractive the location of the edifice, the easier the edifice will pull new renters, re-lease and bring forth rental income. The same applies to a edifices alternate usage potency. In this instance, the more versatile the usage of a belongings, the faster and easier it will re-let. In general, rent aggregation loss for a commercial belongings can be through empirical observation set at 4 % of the one-year gross income ( Annex 3 to Nr. WertR 2006 and GuG aktuell 2012 ) . However, non uncommon are tax write-offs at around 8 % of the one-year gross income. The rate degree is thereby dependent upon creditworthiness of renters, location, standard/quality of edifice equipment and the market state of affairs ( Menges 2011, p. 50 ) .

Runing costs under A§ 19 ( 2 ) 4 ImmoWertV arise on a regular footing in effect of the ownership of the belongings and usage of the capable belongings. In German commercial existent estate running costs are normally wholly passed on to the tenant/occupier and include belongings revenue enhancement, insurance fee, costs of H2O disposal, street cleansing, waste disposal costs, heating and hot H2O costs, cost of chimney-sweeping etc. However, these costs can cut down the one-year net income if they arise in the class of lasting vacancy. This is the instance, as in such a state of affairs the fixed costs must be covered by the proprietor.

Non-recoverable operating disbursals can besides be assessed based on experience values at a lump rate of at least 15 % of the one-year gross income. In making this, no distinction is made between the single operating costs ( e.g. belongings direction, care, rent aggregation loss, non-recoverable running costs ) . This, nevertheless, is related to the disadvantage that cost estimations can non be reviewed for their rightness and conformity with the market. Therefore, the single consideration of operating costs is favoured over the ball rate attack ( Menges 2011 ) . Finally, runing disbursals should be assessed with attention, as a alteration in operating disbursals may straight impact the net income ( Zei?ler 2002 and 2006/2007 ) , which represents another of import rating parametric quantity to income value estimations.

‘Liegenschaftszinssatz ‘ and Staying Economic Life

The net income is understood as a changeless payment over the edifice ‘s staying economic life and is capitalized at a present value factor ( Barwertfaktor fur die Kapitalisierung ) , which can be derived from Annex 1 to A§ 20 ImmoWertV 2010 severally can be calculated by fiscal mathematics. The present value factor, besides known as ‘Vervielfaltiger ‘ ( multiplier ) , is dependent on the edifice ‘s staying economic life and ‘Liegenschftszinssatz ‘ . As the finding of the ‘Vervielfaltiger ‘ involves staying economic life of the edifice, depreciation for wear and tear is already involved within the multiplier. Thereby, an increasing staying economic life consequences in a higher ‘Vervielfaltiger ‘ while an increasing ‘Liegenschaftszinssatz ‘ decreases the ‘Vervielfaltiger ‘ ( Immobilien-Fachwissen Online Lexikon 2012 ) .

Harmonizing to A§ 14 ( 3 ) ImmoWertV, ‘Liegenschaftszins ‘ , or “ gross belongings output ” ( TEGoVA 2010, p. 13 ) , is defined as the “ market based ” mean existent belongings involvement rate, at which the present value of a belongings ( land value and edifice value ) is calculated. It represents the most value act uponing parametric quantity, as even its child alterations have intensive consequence on market value ( Zei?ler 2002 ) .

The capital invested into a belongings represents a hazard for the investor. Therefore, the ‘Liegenschaftszins ‘ is a market oriented existent belongings involvement rate, which reflects market related hazards to which future income watercourse is exposed. This involvement rate reflects the annual alterations due to rising prices as those alterations are neither reflected in one-year rental value nor in costs. Beside of market conditions, the ‘Liegenschaftszinssatz ‘ is related to the hazard degree of the belongings and is extremely influenced by factors like type of belongings, edifice location, status ( province of fix ) , possible of rents to increase or the continuance of rental understandings. The lower the hazard associated with the belongings, the lower the degree of involvement rate. The lower the involvement rate, the higher the ‘Vervielfaltiger ‘ and accordingly the income value. On the contrary, a higher involvement rate leads to a lower ‘Vervielfaltiger ‘ and consequences in a lower income