Definition:
The real value of a property is based on a simple assumption: a buyer today will only pay as much for a property as they would have to pay for the purchase of the building plot and the construction of the building. Accordingly, two elements are crucial: the land value and the current market value of the building.
When is the real value method used?
The real value method (commonly referred to as the asset value or net asset value method) is used for properties where there are few comparable properties and where the value is not determined by rental income. This therefore applies to owner-occupied properties which are, however, so unique in nature that there are hardly any comparable properties available. The real value method is also suitable for so-called ‘collector’s items’ with many distinctive features.
Examples include a rustico in Ticino, a remote, converted farmhouse in the Alps or a flat in a listed castle.
How is the real value calculated?
To calculate the real value, experts use the following formula:
New-build costs + land value – depreciation due to age = real value
The individual components of the formula are calculated as follows:
- New-build costs
Firstly, the cost of constructing the same building from scratch is calculated. The construction costs for the building are determined by applying a reference price per cubic metre of volume. In most cases, the reference price is derived from the Building Cost Plan (BKP), which was developed by the Swiss Central Office for Building Rationalisation (CRB). In addition to the price per cubic metre for the building itself, ancillary construction costs (including planning and design costs, site development costs, financing costs, and administrative and processing costs) and the costs of site works must also be taken into account. - Land value
When using the real value method, the value of the building plot is usually determined using statistical data per square metre from price comparison services such as Wüest Partner, IAZI or Pricehubble. It should be noted, however, that these values are relative, as they do not take into account the specific usability of the plot.In addition, the land value must take into account the demolition costs for the existing building.To value building land, experts recommend the residual value method, which is also used by the Swiss Landowners’ Association. - Age -related depreciation: Age-related depreciation is calculated by first determining the refurbishment cycle of each part of the building, i.e. the average time span until complete renewal. The technical age of the building – the average of the differences between the service life and the remaining useful life of the individual parts of the building – can be used to determine the extent to which the building is already ‘worn out’. The timing of the next cyclical refurbishment indicates when renewal will be required. Based on the proportion of the respective renewal costs relative to the total value and the duration of the refurbishment cycle , the annual depreciation due to age is calculated, which reflects the building’s annual loss in value.
What other valuation methods are there?
Provided there are sufficient comparable properties – as is usually the case with detached houses and flats – hedonic models (the comparative value method) are used in most instances.
For investment properties, the value is determined using the income approach or the discounted cash flow method. These methods focus on current and future annual rental income and the expected annual return for a potential buyer.
As already mentioned, the residual value method should be used for building land. With this method, a project study is used to determine the realisable potential (number of buildable units and square metres of floor area), which is then valued. The expected construction costs, including the contractor’s profit and risk, are then subtracted from this value, resulting in the final land value.
A comparison of the main valuation methods
| Real value | Hedonic | Residual | DCF / Income value | |
|---|---|---|---|---|
| Short definition | New construction costs + land value – age-related depreciation | Value based on comparable data from similar properties (statistical model) | Land value = project value – construction and ancillary costs | Value = discounted future income (cash flows) |
| Suitable property types | Special properties, unique properties, few references | Apartments, single-family homes, solid base of comparable properties | Building land | Apartment buildings |
| Advantages | The substance of the building is taken into account | Market potential is optimally considered | Calculation based on the optimal use of the plot | Current and future cash flows are considered, sustainable approach |
| Disadvantages | The market (supply and demand) is not sufficiently considered | Limited reliability when there are few comparable properties | Very time-consuming; a project study is essential | Very complex calculation; discrepancy between target and actual rents |
Conclusion
The real value method is an indispensable tool in property valuation. It is always used when comparative values are lacking or when rental income does not provide a reliable basis. Particularly in the case of unique or highly customised properties, it enables an objective and transparent valuation. Despite its limited scope of application, it remains essential for experts – not so much as a standard method, but rather as a precision tool used in specific situations.
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