Valuation of open-ended property funds: focus on the income capitalisation approach

Transparency and accuracy: the valuation of open-ended property funds in detail

The valuation of the property asset class differs significantly from the valuation of shares, whose price is determined by supply and demand on a liquid market. In the property sector, numerous additional factors influence the market value; each property is unique and requires an individual valuation. Therefore, the value of shares in an open-ended property fund cannot simply be determined via market prices; there is no continuous trading that generates prices on an ongoing basis.

Valuation methods: comparative value, asset value and capitalised earnings value

There are basically three methods for determining the value of property:

1. Comparative value methodThe value of a property is determined by comparing it with similar properties that have already been valued. This method is practically only applicable to almost identical areas, such as several flats in an apartment block, and is therefore used far less frequently.
2. Asset value methodThis method focusses on the physical substance of the property. It determines the land value and the theoretical production costs and deducts the reduction in age value. Market adjustment discounts or surcharges and other property-specific features are added. This method is mainly used for detached and semi-detached houses, where the value of the building fabric is decisive for the buyer.
3. Income capitalisation approach: In the case of open-ended property funds, the value of a property is usually determined using this method. It calculates the capitalised income value of investment properties based on the net income that can be achieved in the long term.

The capitalised earnings method: A detailed look

The capitalised earnings value method consists of several steps:

• Land valueThe land value is determined separately, as it exists independently of the property.
• Yield from buildingsThe capitalised net income of the property is calculated on the basis of sustainably achievable rents less management costs and the risk of loss of rent.
• MultiplierA multiplier is calculated from the remaining useful life of the property and the property interest rate.
• Damage: Structural damage is deducted from the capitalised earnings value.

Other factors: location, location and rental agreements

In addition to the pure calculation, numerous other factors play a role:

• Location and neighbourhoodThe geographical location and the neighbourhood of the property are key influencing factors.
• EquipmentThe quality of the property's fixtures and fittings is included in the valuation.
• Occupancy rate and tenant creditworthinessThe current occupancy rate and the creditworthiness of the tenants are also relevant valuation factors.
• Rental agreementsDetails in the rental agreements, such as agreed regular rent increases or rent-related inflation adjustments, have a significant influence on the value of the property.
• Market environmentThe economic strength of the region, population growth and infrastructure quality are among the aspects of the environment that are relevant to the assessment.

Stability and reliability through independent experts

The careful and comprehensive review by independent appraisers prevents sudden changes in property valuations caused by short-term market situations. This ensures a reliable and realistic valuation of the properties and the fund assets as a whole. The legal basis is the German Property Valuation Ordinance (ImmoWertV), which prescribes standardised and fair valuation standards.

Final evaluation of the open-ended property funds

The total assets are decisive for the final valuation of an open-ended property fund. This is made up of the value of the properties held, available liquid assets and other assets. Deducting all liabilities results in the net asset value, which is divided by the number of fund units issued to give the unit price.

The role of open-ended property funds in the current market environment

Despite the challenges posed by the current interest rate policy and measures to combat inflation, open-ended property funds continue to offer stable and attractive return opportunities. The focus on sustainable rental agreements, high-quality fixtures and fittings and favourable locations offers protection against volatile market movements. Diversification and long-term planning also make these funds a reliable form of investment that promises security and stability in uncertain times.

The long-term potential of the property markets remains unbroken. Investors should be aware of these opportunities and utilise the advantages of professionally managed and structured funds in order to benefit from stable returns in the future.

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Kind Regards

Matthias Holzmann