How To Determine The Value Of An Office Building

Determining the market value of the property is imperative, especially office building value. A fair value, determined objectively and transparently, is the basis for investors, buyers as well as sellers, to conduct transactions effectively. Real estate is a must. A fair value, determined objectively and transparently, is the basis for investors, buyers as well as sellers, to conduct transactions effectively.

Cost method to determine office building value

Book value, or in other words the total cost spent to construct and complete the office building, maybe less than, equal to, or exceed the market value. Investors always want the real estate value to be higher than the total construction costs because investors always expect a reasonable profit for the invested capital.

However, in cases where the development of an office building is not reasonable, for example, building a Grade A office in a non-central area, making the rent lower than the economic rent, or the construction cost is high due to high-interest rates. High rates and inflation, or poor building management, of which can reduce profits to less than total costs. Therefore, book value cannot reflect market value because the value is defined by market supply and demand.

Comparative method

Limited liquidity compared to listed stocks has always been a feature of investment real estate in Vietnam. Office buildings are no exception. There are very few recently traded office buildings in HCMC, notably only Gemadept, Union Square, and Saigon Tower. Transaction details are often not available and the registration of land use rights is not public, so it is difficult to find exact transaction details.

Income method

Another method of accurately recording the income potential of an asset and therefore its added value is also very useful. The income method calculates an asset’s value using annual net profits and an appropriate capitalization rate or discount rate.

This rate can be used to compare rates with other asset classes such as stocks, gold, and foreign exchange, and thus, assessing investment returns can be made easier.

The weighted average cost of capital (WACC) method to determine office building value

Many financial analysts in Vietnam use the WACC method to determine the capitalization rate for valuation. WACC is concerned with the capital structure of the business, the cost of debt, and the expected return on equity. It is perfectly reasonable for investors to use the above method to determine the value of their property, but is its market value?

WACC (Weighted Average Cost of Capital) = the average cost of capital of the business.

WACC is only based on specific returns associated with a particular business, not the market as a whole. This is why assessing the assets of a business using WACC can vary between types of investors, such as 100% equity and 100% debt financing. Investors have very different motivations and capital structures, the WACC only shows what the minimum expected rate of return a business is, not how much the market will pay for a property.

You can read the previous article here: Guidelines for Requesting Office Rental Discount

Analysis of available transactions in the office building market

The market rate of return is the best method for finding investment property value. The capitalization rate derived from market analysis represents the expected return on investment in an active asset, unaffected by the capital structure or the investor’s subjective expected return. This rate also reflects an acceptable investment return based on the market.

How to determine market value?

In countries with developed real estate markets, real estate transactions on the market are recorded and published. Publicly listed companies have strict regulations on governance and information disclosure, thus ensuring the reliability of net asset value (NAV). Investors can then confidently use these valuations as the basis for a company’s balance sheet. However, in Vietnam and many other places, NAV is also frequently criticized and lost the confidence of investors.

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