Income capitalisation approach: Value determination for investment properties
The income capitalisation approach is primarily used for rented residential and commercial properties. It is suitable for apartment buildings, office and commercial buildings, shopping centres, multi-storey car parks and logistics areas. The aim is to realistically reflect the market value of the property based on the achievable income.
The basis: Determining annual net income
The starting point is the annual net income of the property. For this purpose, the annual rental income is recognised and adjusted for the costs of maintenance, administration and possible vacancies. The result is the net income that the owner can actually generate.
Land value as a second factor
The land value is then determined, usually using the Comparative value method. The total income value of the property is calculated from the land value and the rental income.
Simple vs. complete capitalised earnings value method
- Simple capitalised earnings value method: Only the income from the building itself is taken into account here. The value of the land and the interest on it are not included.
- Complete capitalised earnings value method: In addition to the building income calculation, the land value interest rate is determined using the property interest rate. This interest rate comes from the local expert committees, which derive it on the basis of past sales transactions.
Property interest rate and value development
The property interest rate only accrues interest on the land value, not on the standing property. While the land value can change with the market situation, the building itself is subject to a natural decline in value. Without regular modernisation, the quality of the property declines over time, which has an impact on potential rental income.
Individual value adjustments
As with the comparative or asset value method, factors that reduce or increase the value are also included in the capitalised earnings value method. For example, if a costly roof renovation is imminent, this is taken into account in the purchase price. The potential buyer recognises the future investment requirement and pays less accordingly.
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Robert Schüßler
Property valuer (EIA and IHK)
