No matter what real estate agency makes the estimation for a property, the base price does not differ much. There are many methods for making the calculation. We have provided the simplest one below as an example.
Real estate companies see the base price of an property’s value as almost the same. Properties with land attached, regardless of being a residential or investment property, the assessment is derived from the land value per square meter of the land that the property faces. For example, 100m2 of land with a land price of 450,000 yen per square meter will be 450,000×100=45,000,000 JPY. Then the price of the building is added. As for the asset price of a building, it is decided by the building's age in years, price of materials used, such as wood or reinforced concrete. In addition, the building's structure has a decided number of legal durable years. The asset value of building depends on the square meter price of materials every year such as wooden, reinforced concrete etc. Besides, legal durable year of a building is determined by its structure.
For example, the present asset value of a building of reinforced concrete structure completed in 2004 with a total floor area of 100m2 can be calculated as follows:
The building cost of reinforced concrete structure in 2004 was 176,100 JPY per square meter, so 17,610,000 JPY for 100m2. The number of legal durable years for a reinforced concrete structure is 47 years. So a 10-year old residence has 37 years left. Accordingly, the price of the building needs to be multiplied by 37 and divided by 47 resulting in a price of 13,863,191 JPY for the current value of the building. Accordingly, calculating the price of the land + the value of building gives you a base price of 58,863,191 JPY.
However, real market prices are usually higher. Generally speaking, most real estate firms divide the base price by 0.7 to get a market price for a listing. So therefore, in this example, the listing price might actually be 84,090,272 JPY.
Compared to a detached house or a whole building, it is said that asset assessment of a condominium is theoretically difficult. In the case of a detached house, the building depreciates, but the land’s price remains. The foundation of an asset value is the actual land in the end. Nevertheless, in the case of a high-rise condominium in the center of the city, a relatively small amount of land is owned by hundreds of homes in the building and therefore the share of land held by one home is substantially zero. Therefore, if calculating the asset value the same way as a detached house, the price will not be a fair assessment. For example, the price of a 100m2 condominium made of reinforced concrete structure that is 10 years old is about 13,860,000 JPY when calculated in the same way as above. Even if the condominium is in Roppongi or Hiroo, no matter how expensive the land price is, the price could almost never reach a hundred million JPY as long as the share of land was small. In that was the case, how could we explain that condominiums, which can be seen all around the city, seem to hold their price even 10 years after construction? The explanation can only be the factors of name value, so-called rareness, and demand-and-supply.
When real estate companies determine the price of a used condominium, they refer to recently closed transactions of similar condominiums. If there is no case of a similar condominium selling in the same building, real estate agents will reference the price of closed transactions for condominiums in the area of the same grade and built around the same year.
Regarding investment properties, there is a debate on whether the profitability (income approach) should have priority over the quality of the asset. The way of thinking about the income approach is simple. It is basically the average yield for similar age and structure of properties on adjacent land is standard. For example, lets take a reinforced concrete building in Aoyama constructed 10 years ago that is located a 5-minute walking distance from Omotesando station. Supposing the properties near by share the same conditions of adjoining road etc. and are trading at a rate of return of 5%, then 5% is the standard. If the property has an annual rental of 18,000,000 JPY, the value of the property according to an income approach, can be calculated as 18,00 0,000 JPY ÷ 0.05 = 360,000,000 JPY.
This method of assessment is applied especially for assessment of so-called Noppo (tall) Building on a small piece of land on a busy street in the bustling part of the city. The building degrades, but the land does not. Therefore, there is a tendency to put emphasis on the land’s asset value. But the most important point lies in how much profit the investment property can actually generate. If the existing building is producing a reliable cash flow, the building can hold a special value even if the land is small and the building is old. This is because cash flow can accumulate by holding and leasing out the building instead of having it sold.
Matters like this can be considered a phenomenon that occurs when a property is mis-valued by concentrating mainly on the land price. Present cash flow ought to be considered substantially when calculating an asset’s value. If at some point in the future the mis-valuation is reassessed, it is quite possible that the asset value of the property will rise.
Above was a summary of the basic thinking process of real estate agents. If there are any properties of interest to you, that our company is not the dealer, still feel free to contact us to inquire about them.