Talk:German income approach

Can I just say that this article is very well done for the 1st write up. Very impresssive. Aflumpire 11:24, 20 September 2007 (UTC)

Thanks a lot, always nice to hear that ;-) I tend to do some work in the sandbox first rather than starting a stub.

After some work on the main article Real estate appraisal and having some interesting discussion with User:Tkeu that showed me that there might be interest in this topic, I decided to do a little work on the Ertragswertverfahren. Somehow more and more aspects turned out to be essential, therefore excuse me if the article seems a bit long. Of course I am open to any suggestions on sections to be expanded or shortened.

As I am no native speaker, please be so kind and feel free to do some rewording. --Sunshinemind 11:29, 20 September 2007 (UTC)

Liegenschaftszins and Liegenschaftsszinsatz

I am a bit confused between the Liegenschaftszins and Liegenschaftzinssatz: If I understood correctly, the former is the rental value while the latter is the yield. If so, why do you compare the Liegenschaftszins to the All Risks Yield, which is a) a ratio (percentage) and b) is the yield on the whole of the property, land and improvements included? Tkeu 16:40, 20 September 2007 (UTC)

You are right, I corrected the mistake. In day-to-day work we often just say Liegenschaftszins when meaning Liegenschaftszinssatz, even though that isn't correct. --Sunshinemind 07:41, 21 September 2007 (UTC)

Entry name

I think it would be advisable to change the name of the entry to "German income approach", which is much easier on English-speakers.

Like user:Aflumpire, I too would like to congratulate you on a very impressive contribution. Tkeu 16:43, 20 September 2007 (UTC)

Think you are right on that, created and redirected. --Sunshinemind 07:48, 21 September 2007 (UTC)

Two approaches to valuing land and improvements

This article has brought in an interesting perspective - that of the German income approach - to the problem of the apportionment of capitalisation between land (existing in perpetuity) and buildings (should be capitalised for the remainder of their useful life only).

In UK practice, something similar is achieved in a different manner: the income on the freehold interest, which usually comprises the ground rent only, is capitalised to perpetuity (this is the value of the land). However, the net income from the leasehold interest (the income from the subleases minus irrecoverable service costs minus the ground rent payable) is capitalised for the remainder of the lease period only, at a higher capitalisation rate, which includes an allowance for a sinking fund factor (the "dual rate", which would enable the lessor to recoup his capital outlay on improvements at the end of the lease period). In essence, these two approaches - the British and the German - are one and the same (at least as construed in their original traditional forms). Tkeu 10:41, 22 September 2007 (UTC)

This UK practice is interesting and at least partly new to me. So far I understood that in the case that land and bulding are owned by the same person or entitiy, the value of the land is not (separatey) looked at. Therefore my question: Is this discrimination between value of land and building standard approach in UK or only used (i) if freehold and leasehold differ respectively if (ii) the remaining life span of the building is short?

And if the lease period ends after e. g. five years and the remaining usable life span is e. g. 15 years, how to work with that? Greetings, --Sunshinemind 08:13, 27 September 2007 (UTC)

In UK practice, leaseholds would always be capitalised for the remainder of the lease period; freeholds are capitalised in perpetuity. You are right that this analogy to the German income approach only works if the freehold is on the land only and if the lease corresponds to the remaining useful life-span of the building. Historically, leases in the UK were very long, e.g. 25 years was considered a short lease. In such a setting, and when the freehold is on the land only, the two approaches - the German and the British - would seem to me to be practically the same.

The more I delve on the subject, the more the German approach seems to me to be the theoretically correct method (as for its practical significance, that is a different question - as you yourself have pointed out that the difference tends to nil with a remaining useful life-span of over 30 years). On the other hand, UK practice is more refined in its treatment of the rental income, i.e. the distinction made between the passing rent (the existing rent on the building), which is capitalised until the end of the lease or until the next revision, and the market-derived Estimated Rental Value (ERV) which is capitalised in perpetuity. It is important to note that in the UK rent payments are not indexed, so that the distinction between the passing rent and the ERV is much more important than in Continental Europe where, if I am not mistaken, rent payments are traditionally indexed to account for inflation.

So what is the "best" approach? In my opinion, for theoretical purposes, as per example when first studying valuation in the classroom, the most explicit possible method should be employed, i.e. a combination of the British and German models, which would capitalise the building for the remaining useful life-span only, but which would also differentiate between the passing rent and the ERV. This should be part of the theoretical background known to all valuers. However, for valuing in practice, the valuer's experience should guide him as to what measure of refinement need be employed.

One last comment: the most refined method in use in the UK today isn't the traditional layer or term & reversion methods, but the Short-cut DCF model developed by Professor Neil Crosby. For a good grounding in UK valuation practice, I suggest either Advanced Valuation by Diane Butler and David Richmond or The Income Approach to Property Valuation by Andrew Baum and David Mackmin. Hope this reply isn't too long. Grüße, Tkeu 09:17, 27 September 2007 (UTC)

Thanks for the comprehensive reply. Indeed it is very interesting to compare the approaches. In a rathter theoretical way, one would have to assign different discount rates not only to the terms, but also to income and expenses (as the expenses will occur with a higher degree of propability), but this would be impractible.

Indexation of rents in Germany are common to many commercial lease contracts, but depends on the individual contract (today indexation is usually connected to the VPI - consumer price index - but percentage of indexation (not always 100 %) and trigger vary).

If I understand you correctly, the short-cut DCF combines the distiction of existing and market rent used by term and reversion with the general DCF technique. That makes good sense. --Sunshinemind 10:31, 27 September 2007 (UTC)