EWV) is the standard income approach used in Germany for the valuing of property that produces a stream of future cash flows.
The Vergleichswertverfahren (sales comparable approach) is mainly used to determine the value of owner-occupied buildings (single-family houses, condominiums) and land.
Even though the EWV is mostly consistent with international practice, there are some important differences: Real estate appraisal in Germany is regulated by the federal Baugesetzbuch (abbr.
can significantly increase the building's remaining useful life, depending on the scope of the refurbishment and assuming that other considerations such as layout and energy consumption do not confound the effort.
The yield, which in German valuation practice is known as the Liegenschaftszinssatz, is a crucial value driver, as it will be used to determine the Liegenschaftszins (a notional rent subtracted from the building's net operating income in order to account for the usage of the economic good "land").
By empirical analysis of the purchase price data base, the GA stipulates the local yield by type of use.
During the past few years, yields for residential assets (multiple dwellings) were usually within the range of four to five percent, depending on local market conditions.
The determined basic yield (for type of usage and municipality) should always be analysed further, as under or above average liquidity, lay of the land or the floor plans, should be taken into account by way of a deduction or premium of 25 or 50 basis points for each respective factor.
Needless to say, the Rohertrag (gross income) is the most important value driver for real estate which produces future cash flows.
In contrast to commercial real estate, residential lease contracts are highly codified by the Bürgerliches Gesetzbuch (abbr.
New leases must not be more than 20 percent (not exactly stated by BGB, depending on the jurisdiction) higher than the local customary comparable rent, or the rental contracts may be nullified.
A special case is the existence of struktureller Leerstand (long-term or structural vacancy) resulting from an imbalance in the market or from unfavourable characteristics of the subject property.
It should be observed that contracts in Germany generally prescribe that the landlord bears a higher portion of maintenance and operating costs than their counterparts in the US and UK After the determination of the value drivers, the calculation procedure itself is rather simple.
In order to transform the yearly NOI into the building value, the multiplier is mathematically (or by use of tables provided by the WertR) determined from the residual usage period and the yield (after adjustments).
German PAP generally advises to rely on existing numbers, but allows to fall back on empirical values and experience when needed.
Being highly standardised, the Ertragswertverfahren - when applied professionally - offers the reader of the report the opportunity to quickly examine and assess its underlying assumptions.