Methods of Valuing Office Buildings
Determining the market value of the property is imperative, a fair value, objectively and transparently determined. So we will bring some methods that you can use for valuing office buildings.
What is the value of the office building for rent? and Methods?
Real estate has long been, along with bonds and stocks, one of the important investment assets in the Vietnamese market as well as in the world. Especially in a country with a history of high inflation, large corporations, financial institutions, and individuals view real estate as an investment that generates low-risk returns and can preserve capital. With a young population structure, a high proportion of people of working age, and increasing prosperity, commercial offices are also a strategic investment channel for the future.
While bond and stock prices can always be determined quickly thanks to high liquidity in the stock market, conversely, the market value of an active office building requires a different approach. These are the following methods:
– Cost method:
Book value, or in other words the total cost spent to construct and complete the office building for lease, maybe less than, equal to or exceed the market value. Investors always want the value of the real estate 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 office buildings 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, all 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. Buildings for rent 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 an asset’s earning potential and hence 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, foreign exchange, and thus, assessing investment returns can be made easier.
– Average cost of capital (WACC) methods:
Many financial analysts in Vietnam use the WACC (average cost of capital) method to determine the capitalization rate for valuation. WACC is concerned with the capital structure of the business, or the cost of debt, and the expected return on equity. It is perfectly right for investors to use the above method to determine the value of their property, but is its market value? 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 motives and capital structures, WACC only shows what the minimum expected rate of return a business is, not how much the market will pay for a property.
– Analysis from available transactions in the 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 operating 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.
To determine the market capitalization of this property, factors such as the approximate market rent of US$30/m² must first be determined, operating costs, brokerage fees, promotion fees, the time needed to find a new tenant, capital costs, etc. These factors must be market-based, not just historical performance information. After analysis, a capitalization rate is determined, and in this case approximately 10%. This market-based rate of return can be applied to other assets to determine market value.
– How to determine market value?
In countries with developed real estate markets, real estate transactions on the market are clearly 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. Not only in Vietnam, in many other places, NAV is also frequently criticized and lost the confidence of investors. Therefore, the real estate industry urgently needs accurate valuation methods that follow international standards and a strong database that tracks and analyzes market transactions. Savills is a pioneer in building databases for the real estate market. This data is a valuable tool in disseminating accurate valuations to aid in promoting good governance and thereby giving investors more confidence to invest in commercial real estate.
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