A suitable residual method for valuing land with development potential

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Land valuation is an important step in the development of a real estate project. Photo: H.Anh

Experts suggest not to abandon the residual method

Currently, the Ministry of Natural Resources and Environment is collecting comments from relevant ministries, sectors and agencies on amending the Government's draft Decree 44/2014/ND-CP on land prices and Draft Circular amending and supplementing a number of articles of Circular No. 36/2014/TT-BTNMT of the Minister of Natural Resources and Environment detailing land valuation methods; building and adjusting land price list; specific land valuation and land price determination consultancy.

Land valuation is an important step in the development of a real estate project. According to a recent survey by the Ministry of Construction, more than 50% of real estate projects are facing difficulties, obstacles or slow implementation due to the difficulty in determining land prices according to the market price method. In 2022, the ability to determine "market" prices has also contributed to a sharp decrease in real estate supply compared to 2021.

According to Do Thi Thu Giang, Director of Consulting Services, Savills Ho Chi Minh City, an expert with many years of experience in valuation, there are many different valuation methods, depending on the characteristics of the property and availability of data will have appropriate approaches and valuation methods.

For example, with the land price adjustment coefficient method, the adjustment coefficient is applied fixed in a period, not reflecting market fluctuations in a short time. In addition, the adjustment coefficient is also based on the analysis of limited and imprecise land transaction data.

Meanwhile, the residual method will be more suitable when valuing large and developing land plots. This method takes the estimated revenue minus the estimated investment cost to get the remaining land value.

“Assume a piece of land has a potential use for commercial services. With the comparison method or the adjustment factor, the land value will be estimated to a specific value. However, with the residual method, the land can be assumed to develop with different types of commercial services such as offices, shopping centers, or hotels, thereby finding the highest value. of the land area, ensuring the best and most effective valuation principle for the property", the expert cited.

In another example, the land to be valued is a mixed-use land with residential land and commercial and service land. Thus, the use of the comparative method or the adjustment coefficient will not be able to fully and accurately reflect the mixed value due to limitations on the number of comparable properties in terms of proportions of components in the mixture or the absence of a suitable coefficient.

Do Thi Thu Giang believes that the residual method should be retained because it is suitable for estimating land areas with potential for development or redevelopment.

The land price adjustment coefficient method ensures transparency and fairness

Assessing more on the role of the surplus method, Troy Griffiths, Deputy Managing Director of Savills Vietnam said that, in most cases, the removal of the surplus valuation method will lead to a more conservative valuation. more important.

“Land funds that are being planned for project development will be valued more accurately through the residual method. This method represents the overall profitability of the project as well as financial indicators that indicate whether the project is financially sustainable,” said Troy Griffiths.

Regarding the surplus valuation method, Nguyen Dinh Trung, Chairman of the Board of Directors, General Director of Hung Thinh Corp, said that currently real estate projects are calculating land use fees according to the surplus method. This is the best option so far, in which it is reasonable to apply the CPI in calculating land use fees by the residual method.

However, many localities do not apply the local CPI but apply the national CPI. The opinion of many experts is that it is necessary to apply the local CPI to accurately reflect the growth and economic status of the locality, avoiding the situation of high real estate prices in some places.

The representative of Hung Thinh Corp also suggested that the Ministry of Natural Resources and Environment, the Ministry of Finance, and the Ministry of Construction consider the solution of using the land price adjustment coefficient method (also referred to as the K-coefficient method) like many experts. Experts and Ho Chi Minh City Real Estate Association have proposed.

With this method, enterprises can calculate the land use levy that they have to pay before deciding to invest and cooperate in investment. ensure budget revenue and harmonize the interests of the people - the state - enterprises.

The Real Estate Association of Ho Chi Minh City supports the application of the "land price adjustment coefficient method" to determine specific land prices to calculate land use fees and land rents for real estate projects, commercial houses, etc. Commercial and urban areas will "formulate" the land price, appraise the land price to help the State and businesses "foresee" the amount of land use and land rent of the project to be paid into the state budget. , contributing to ensuring transparency and fairness, not causing loss of state budget revenue, loss of public property which is land resources.

This method also overcomes the situation that land use fees and land rents are currently "unknown" easily creating a mechanism of "ask - give", corruption, negativity, or potential "legal risk” for public servants and public employees in the performance of their official duties and related persons.

Accordingly, the Team proposes to add the surplus method to the Draft, and at the same time add a batch land valuation method (which is a land valuation method that integrates one or several land valuation methods using technology, artificial intelligence, a database of land prices and statistical probability algorithms to calculate the average land price indexes of the land price list by route or area).

Also according to the Association's proposal, the provincial-level People's Committee decides to select a land valuation method to apply in accordance with local realities.

Previously, according to the draft Decree and Circular mentioned above, the land valuation methods have been adjusted, according to which there are only 3 methods, including: comparative method, income method and adjustment coefficient method. land price (the method of surplus, the method of deduction as current regulations will no longer be used).