Income capitalization approach Munich - property valuation for investors and sellers

1 What is the income capitalization approach?

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The income capitalization approach is one of three officially recognized methods for determining the value of real estate in Germany. It is primarily used for yield-oriented properties, i.e. properties that generate income through letting or leasing. In contrast to other methods, the income capitalization approach does not primarily look at the net asset value of the property, but at the future income that can be expected from the property. Put simply, the value of a property is derived from its income.

In practice, the income capitalization approach is used in particular for rental properties (e.g. apartment buildings) and commercial properties where the property value is largely determined by rental income. The procedure is regulated in §§ 27-34 of the Real Estate Valuation Ordinance (ImmoWertV) and forms a central basis for determining the market value of such investment properties.
"An accurate valuation is the basis for a successful sale. Especially for investment properties in a booming city like Munich, the income capitalization approach is often the key to determining a realistic market value and achieving a fair market price," explains Norbert Verbücheln, Managing Director of Mr. Lodge.

2 How does the income capitalization approach work?

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When determining the value using the income capitalization approach, the focus is on two components: land value and building income value. If both are added together, the result is the capitalized earnings value, i.e. the projected market value of the property.

• Land value: The land value corresponds to the value of the undeveloped plot of land. This is usually determined on the basis of standard land values, which indicate the price per square meter for land in a comparable location.
• Building income value: The building income value represents the value attributable to the building fabric from the income of the property. To calculate this, the annual gross income (rental income per year) is adjusted for ongoing management costs (e.g. maintenance, administration), resulting in the net income of the property. The so-called return on land value is then deducted - this is the amount that could be achieved if interest were paid on the land value. What remains is the building net income, which is multiplied by a multiplier (depending on the remaining useful life and the standard market property interest rate). The result of this capitalization is the building income value.

The property interest rate plays a central role in this procedure: it reflects the standard market interest rate for real estate investments and is derived by the expert committee on the basis of purchase price/rent ratios. A low property interest rate (e.g. in highly sought-after locations) leads to higher income values, while a higher interest rate depresses the income value - because a buyer would want to pay less for the same rental income if the market had high yield expectations. The result of the income capitalization approach is correspondingly sensitive to changes in rents or interest rates: rising rental income increases the income value, while rising interest rates (higher property interest) can reduce the calculated value.

Tip: A well-maintained property and rents in line with the market can significantly increase the capitalized earnings value. Modernization, avoiding vacancies and optimizing management can increase the annual net income - and thus also the building's income value, which ultimately results in a higher sales price.

3. the income capitalization approach in Munich

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The purchase prices for residential real estate in Munich are high in relation to the achievable rents. In the past, this has led to extremely low yields: The average property interest rate for apartment buildings in Munich in 2022, for example, was only around 1.4% in some cases. Such a low interest rate reflects enormous purchase prices in relation to rental income (yield factor of over 30). For investors, this meant that investment properties in Munich generated comparatively low current yields for a long time.

However, the market is currently undergoing a change. With rising interest rates and slight price corrections, the key figures have normalized somewhat: In fall 2024, the average property yield in Munich was around 2.7%. Multi-family homes offer slightly better yield prospects again due to higher rents and moderately lower purchase prices. In concrete terms, this means that with a higher property interest rate, the calculated multiplier is lower, which tends to lead to lower (more realistic) income values - the market value is approaching what investors are prepared to pay with higher interest rates. Nevertheless, Munich remains a market for investors with relatively low initial yields but stable performance.

"Munich is a special market. Despite high prices, capital investments here offer long-term security," says Norbert Verbücheln. "Our expertise in price and market developments in Munich and the surrounding area helps owners and investors to know the realistic market value of their property and make informed decisions."

4. capitalized earnings value, asset value or comparative value - when to use which method?

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Not every property in Munich is valued using the income capitalization approach. There are three recognized methods in Germany: the comparative value method, the asset value method and the capitalized earnings value method. Each method has specific areas of application:

• The comparative value method compares sales prices of similar properties and is often used for condominiums or unrented single-family homes, provided sufficient comparative data is available.
• The asset value method determines the value using the asset value (land value + construction costs less depreciation) and is mainly used for owner-occupied houses or unique properties where income and comparative prices do not play a major role.
• As described, the income capitalization approach is the preferred method for investment properties, i.e. rented residential and commercial properties, because the income component is the main focus here.

Experienced property valuers such as Mr. Lodge choose the appropriate method depending on the property - or combine several methods to determine the realistic market value. Particularly in complex cases (e.g. mixed properties), a combination of comparative and income approaches can be useful in order to obtain a coherent overall picture. It is important that the chosen method does justice to the characteristics of the property and takes current market data into account.

Note: In Munich, the income factors (ratio of purchase price to annual rent) were extremely high for years. In 2022, the multiple of the gross yield reached its peak value, since then it has fallen slightly - in the first three quarters of 2024, the average yield factor was around 31, comparable to 2015. At the same time, the property interest rate rose again from historic lows of 1.4 % to around 2.7 %. For owners, this means that income capitalization valuations are currently changing: Higher interest rates mean that the calculated values are slightly lower than in 2022, while rising rents mitigate the effect. Ongoing market observation is therefore essential, especially in Munich.

5 Mr. Lodge - Your expert for real estate valuation in Munich

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Valuing a property is complex - especially in Munich, where market knowledge is worth its weight in gold. As one of Munich's leading real estate agents with over 30 years of experience, Mr. Lodge knows the local market inside out. Our real estate agents are experts in valuations and property sales and have extensive regional market knowledge. This knowledge advantage is crucial for valuing properties in line with the market and selling them successfully.
"At Mr. Lodge, we combine many years of experience with in-depth market expertise for Munich and the surrounding area," emphasizes Norbert Verbücheln. "As experts in capital investments and real estate investments, we know what is important to investors. We keep a close eye on price and market developments and can therefore determine and realize the optimum market value for our clients."

At Mr. Lodge, you receive a professional property valuation according to modern standards - free of charge and without obligation as an initial consultation. Our service includes not only the calculation according to the income capitalization, comparative or asset value method, but also an individual classification of the results in the current market. In this way, we ensure that no aspect is left unconsidered: from the quality of the location to supply and demand to the expectations of potential buyers. Ultimately, what counts for us is to achieve a sales price in line with the market for you.