## Real estate valuation

### Valuation

Traditionally in Switzerland, a calculation combining actual value and earning power was used to value real estate for capital investment.

#### General

Average of earning power x 2 and actual value

#### Commercial buildings

Average of earning power and actual value

As is the case in English-speaking areas and the world’s stock markets, in Switzerland the value of properties is increasingly linked with asset management or buying and selling rather than them being viewed as status symbols. This has put the earning-power method of valuation in the foreground. To calculate the asset value, the sum of all future annual rental instalments is added and this figure, in turn, is relativized by the capitalization interest rate (CIR).

### Capitalization interest rate (CIR)

In calculating the earning-power value, the CIR functions

• as a qualitative cost and risk figure in real estate appraisals
• as a factor in ad-hoc valuations (rental income p.a. : CIR x 100).

#### Capitalization interest rate

Earning-power-based real estate valuation puts the capitalization interest rate at the center:

• The CIR should be determined in every case.
• As a rule the CIR consists of
• the base interest rate on capital
• individual surcharges.

#### Capitalization interest rate factors

Cost item Purpose as percentage of investment costs1
or: one-time surcharge in mortgage interest 1st mortgage2
Base interest rate return on capital 4,50%
Surcharges3 maintenance, repairs 0,50% 0,7 – 2,0%
operating costs 0,25% 0,1 – 0,5%
administration costs 0,30% 0,1 – 0,3%
rental risk 0,10% 0,0 – 0,4%
reserves 0,85% 0,5 – 1,0%
Total Capitalization interest rate
6,50%
cf: Daniel Conca, Die Kapitalisierung, Forum für Schätzungsexperten, vom 26./27. September 2003, S. 12 f. (“Capitalization”, available in German only)

Adequate valuation is based on use-based capitalization interest rates:

• residential: 6.5 % – 8.5 % (multi-family dwellings)4
• commercial/industrial: 8.5 %.

The capitalization interest rate should be adjusted depending on the individual property and risk.

#### Rules of thumb

• The higher the CIR, the lower the real estate value.
• The lower the CIR, the higher the real estate value.
• The CIR should be at least as high as the cost-covering yield.

### REGARDING GERMANY’S MULTIPLICATOR METHOD

German usage is based on multiplicators or coefficients to assess value for real estate investments:

• knowing the coefficient helps to infer yield
• knowing the purchase price and annual rental helps to infer both coefficient and yield.

#### Multiplicator method

In Germany, real estate performance is measured by means of the multiplicator method in which the multiplicator is the purchase price divided by rent, minus heating costs.

Knowledge of Coefficient

 Coefficient 10 11 12 13 14 15 16 17 18 19 20 Yield 10% 9,09% 8,33% 7,7% 7,14% 6,66% 6,25% 5,88% 5,55% 5,26% 5%

Knowledge of purchase price and annual rent
(purchase price : annual rent)

 Coefficient 4% 5% 5,5% 6% 6,5% 7% 7,5% 8% 8,5% 9% 9,5% Yield 25 20 18,8 16,7 15,4 14,3 13,3 12,5 11,8 11,1 10,5

#### Determining actual yield

Acquisition costs and non-chargeable costs make coefficient method results somewhat inaccurate.