The most suitable real estate valuation method for multi-storey residential buildings – Housing fund’s perspective

The most suitable real estate valuation method for multi-storey residential buildings – Housing fund’s perspective

The study clarifies current real estate valuation methods and policies applied to housing funds. Moreover, the study figures out general market perspective of the most suitable real estate valuation method for housing fund purposes and its effect on the fair value of funds’ for real properties. The sales comparison method was seen as the best method for real property valuation of housing funds. The values appraised with the sales comparison method are generally higher than values appraised with other methods.

Results

The first housing fund was established in Finland in 2006, and thereafter over 20 funds have been set up. Real property valuation policies and methods vary depending on the fund and there is no consistent valuation method or policy for real estate valuation of housing funds.

The valuation methods applied in housing funds are mainly decided by a fund manager and equity investors. The research material for the study consists of literature, valuation reports and expert interviews. The interviews performed indicate that apartment buildings should be treated as a portfolio of several apartments in the valuation for accounting purposes. The sales comparison method was therefore seen as the best method for real property valuation of housing funds. The study exhibits that the market value of funds’ real assets varies depending on the applied valuation method. The values appraised with the sales comparison method are generally higher than the values estimated with the income approach. The study also indicates that the difference between values increases when the net initial yield of a single apartment decreases. The interviews also indicated that the market has many meanings for the bulk discount term, which is often used alongside the sales comparison method.

Effects

As a result of the study sales comparison method has been widely adopted by fund managers. On the other hand the findings of the study indicate that market players have the will to avoid the overvaluation of real assets, which may lead to conservative valuations. Recognized conceivable, conservative real-asset valuation and valuation-method dependent asset valuation may form a risk for investors’ interest violation if all interest groups do not have a full understanding of the value basis and its effect on the fair value of the funds’ real assets.

Future Opportunities

As a result of the study sales comparison method has been widely adopted by fund managers. On the other hand there is no consistent policies for valuation of residential real estate. This study indicate that market players could find widely accepted valuation policy for real estate funds in the future. When first funds enter into the divestment phase more study is needed about valuation methods used by the fund managers. The valuation methods used in the divestment phase will define the future of real estate valuation.

RYM Program

Indoor Environment

Participants

ICECAPITAL REAM Oy

Aalto University

Contact Person

More info

https://aaltodoc.aalto.fi/bitstream/handle/123456789/15392/isbn9789526060408.pdf?sequence=1

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