Hanoi-Vietnam: Regulations on applying the surplus-based method for immovable property valuation from August 5, 2024

Hanoi-Vietnam: Regulations on applying the surplus-based method for immovable property valuation from August 5, 2024 (Image from Internet)

On June 20, 2024, the Minister of Finance issued Circular 42/2024/TT-BTC on setting out the Vietnamese Standards for immovable property valuation.

1. What is the surplus-based method?

The surplus-based method is a valuation method that determines the value of an immovable property property with development potential. This is based on subtracting the estimated costs incurred (including investor profit) from the total development revenue of the asset.

(Clause 2, Article 3 of the Vietnamese Standards for Immovable Property Valuation issued alongside Circular 42/2024/TT-BTC)

2. Application of the surplus-based method for immovable property valuation from August 5, 2024

• The formula in the surplus-based method:

V = DT - CP

Where:

V: Value of the property;

DT: Total development revenue;

CP: Total development costs.

Implementation details:

• Determine the best and most productive use of the immovable property;

• Determine the projected cash flow period (n);

• Determine the total development revenue (DT);

• Determine the total development costs (CP);

• Determine the value of the immovable property (V).

Cases concerning the timing of development revenue and costs for immovable property:

• Case 1: Development revenue and costs occur within the same year. In this case, the revenue and development costs are calculated at the prevailing market price at the valuation date.

V = DT - CP (as of the valuation date)

• Case 2: The immovable property development process extends over many years, after construction, the property is leased for business or partially leased or sold over many years.

Where:

V: Valuation of the property;

DTt: Projected development revenue in year t;

CPt: Projected development costs in year t;

r: Discount rate;

n: Projected cash flow period;

t: Forecast year.

(Article 5 of the Vietnamese Standards for Immovable Property Valuation issued by Circular 42/2024/TT-BTC)

3. Determination of the best and most productive use of immovable property

The best and most productive use of immovable property is determined based on:

• Characteristics of the property being valued.

• Information on land use planning, construction planning, transportation planning, land use conversion regulations, and construction investment regulations approved by the competent authorities.

• Guidelines for analyzing the best and most productive use as per the Vietnamese Standards for Valuation regarding information collection and analysis on the asset being valued.

(Article 6 of the Vietnamese Standards for Immovable Property Valuation issued by Circular 42/2024/TT-BTC)

4. Determination of Total Development Revenue

• The total development revenue of the immovable property is the projected total revenue of the property being valued, suitable to its best and most productive use.

• Total development revenue of the property is determined based on survey and information collection on transfer prices, rental prices, and other revenue-forming factors (such as sales duration, start of sales, sales rate, occupancy rate) of at least 03 properties with similar characteristics to the proposed investment project in the area where the property is located or in an area with similar profitability, technical infrastructure, and social infrastructure. The analysis should also take into account trends and fluctuations in transfer prices, rental prices, and other revenue-forming factors for the proposed investment project in the future. The determination of total development revenue needs to analyze and assess the feasibility, completion, and operation timeline of the project as committed and per current immovable property regulations.

The determination of fluctuations in transfer prices, rental prices, and other revenue-forming factors is based on market surveys, published statistics, or data from immovable property market management agencies, ensuring it reflects market movements over the years.

• Total development revenue is determined through a market or income approach.

• If total development revenue is generated within the same year, the revenue is calculated at the valuation date against the total product after investment and construction at the valuation date.

• If the development process extends over multiple years, leasing for business or partial sale or leasing over several years, the conversion of total development revenue to the valuation date is done using the general formula:

(Article 8 of the Vietnamese Standards for Immovable Property Valuation issued by Circular 42/2024/TT-BTC)

Detailed information can be found in Circular 42/2024/TT-BTC which takes effect from August 5, 2024.

Nguyen Ngoc Que Anh

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