Condominium unit valuation based on land value, construction costs, etc.

[hyperdimension]

What formula would you use to value a condominium unit based on such factors as the underlying land value, construction costs, and floor area?

 

Here is a table from  THE 2016 COSTS OF CONSTRUCTIONS at thaiappraisal.org that shows construction cost estimates in THB per square metre:

 

[Peterw42]

For what purpose the valuation ? You could end up with a figure that has no relationship with actual sales price etc. The land office sets there own valuation for transfer tax etc.

[trogers]

So, the actual selling prices are deemed too high...and you seek to build your own condo block?

[hyperdimension]

Purposes of valuation can be many. One could be to use as a reference in comparing ask prices of condominiums in various locations. In particular, it may be interesting to have a quantitative idea of how much premium the market has added onto some condominiums purely due to the high demand to stay in it.

 

We can see in the table that it costs at most around 30k THB per square metre per storey to construct. Yet many condominium units in high-demand locations sell for over 100k THB or even 200k THB per square metre. Part of the high price would be attributed to the underlying land value, but the more units there are above the land, the smaller the proportion would be. Personally I am interested to understand justifications for 100k to 200k THB per square metre prices that we see around. By my thinking, only a tiny percentage (e.g. 1%) of such prices is attributed to land value, depending on quantity of units in a building. So would the rest just be due to irrational market exuberance?

 

Would this formula be correct?:

 

Condominium unit value = ((construction cost + land value) * (condominium unit floor area / sum of floor areas of all units)) + (market premium or seller's profit margin)

 

[blackcab]

The cost of concrete and steel for a high rise building can be easily determined, and they are often similar between different projects. The difference for higher end buildings is the cost of the finishing. The finish in a KPN Diplomat condo is considerably more expensive than the finish in a Lumpini condo.

 

In addition, you haven't accounted for the cost of common areas and a lot of developer costs: sales and marketing, legal, accounting, banking, loan interest, staff and office expenses, Non-Claimable VAT, Specific Business Tax, Corporation Tax, etc. All of these costs must be carried by the project before any profit is realised. All of these costs directly impact the cost of each unit.

 

The land for the Diplomat Sathorn was purchased about 4 years ago for 1.2 million baht per square wah. The presales price was approximately 200,000 per square meter.

 

Perhaps another way to answer your question is to work backwards from the answer. The largest developers aim to make 25 percent from a new development. They achieve this from having large economies of scale. If they can get 30 per cent, they would be really happy.

 

Mid sized developers aim for 20 per cent profit. Small developers sometimes don't make a profit due to several factors, the biggest two being gross miscalculation of costs and disputes with contractors.

 

You can get some indication from looking at the back of a condo chanote. It will often state the loan the developer took from the bank to finance the project when the chanote was issued.

 

Overall a developer would argue that 25 per cent is reasonable considering that they could be paying out hundreds of millions of baht for the three or four years before they can receive the bulk of the payments from the unit purchasers. 

[trogers]

I prefer to look at rental yield. Why? It's the market's indication as to whether resources expended on that piece of land has the required demand to justify such an economic expenditure.

 

You can use your method of valuation on a rice field half way to Bang Prakong. But it would not come close to it's true market value.

[Peterw42]

5 hours ago, trogers said:

I prefer to look at rental yield. Why? It's the market's indication as to whether resources expended on that piece of land has the required demand to justify such an economic expenditure.

 

You can use your method of valuation on a rice field half way to Bang Prakong. But it would not come close to it's true market value.

 

I tend to agree , rental yield is usually a good indicator of a properties value. If the yield is close to current bank interest rates, its worth at least as much as the same money in the bank. It doesn't work when properties or markets are booming, its usually good yield or good capitol gain, hard to find both.

[trogers]

5 hours ago, Peterw42 said:

 

I tend to agree , rental yield is usually a good indicator of a properties value. If the yield is close to current bank interest rates, its worth at least as much as the same money in the bank. It doesn't work when properties or markets are booming, its usually good yield or good capitol gain, hard to find both.

 

Rental yield is real cash being earned. Capital gain is not guaranteed (because it is subjected to cyclical conditions) and should only be viewed as a bonus.

[hyperdimension]

18 hours ago, blackcab said:

In addition, you haven't accounted for the cost of common areas and a lot of developer costs: sales and marketing, legal, accounting, banking, loan interest, staff and office expenses, Non-Claimable VAT, Specific Business Tax, Corporation Tax, etc. All of these costs must be carried by the project before any profit is realised. All of these costs directly impact the cost of each unit.

 

You are right, I had not included the costs that you have listed. How much would they total compared with the land cost? I think since the total of such costs would be divided among the units, the impact would be negligible, just as the cost of land is a negligible component of a unit.

 

Based on your example of Diplomat Sathorn, the cost of land was 300k THB per square metre. It has 192 units. Unit floor areas vary from 40 to 205 square metres, but since the quantity of each are not provided, let's assume they are of equal size just for calculation purposes. So each unit's share of land would then be 300k / 192 = 1562.5 THB per square metre. If the ask price of a unit is 200k THB per square metre, the land component is only 0.78125%. If all of those other expenses that you've listed cost around the same as the land, then they may also take up less than 1% of the ask price.

 

If the construction cost was 30k THB per square metre, that is 15% of the 200k THB per square metre ask price of a unit.

 

After accounting for a 25% profit margin, over 55% is left unaccounted. Does finishing a unit really cost over 110k THB per square metre, or over 4.4M THB for a 40 square metre unit? Exactly where does the money go?

 

[hyperdimension]

8 hours ago, trogers said:

 

Capital gain is not guaranteed (because it is subjected to cyclical conditions) and should only be viewed as a bonus.

 

A condominium unit could even depreciate in value, couldn't it?

 

Condominium buildings don't last forever. You can see in THE 2016 COSTS OF CONSTRUCTIONS table that a maximum age is set at 50 years by the Thai Appraisal Foundation. Should we then assume that a unit has become largely worthless at 50 years of age, with only the small land value component being retained?

 

How would you incorporate depreciation into your valuations, particularly when considering a purchase of an old unit?

 

[trogers]

8 minutes ago, hyperdimension said:

 

A condominium unit could even depreciate in value, couldn't it?

 

Condominium buildings don't last forever. You can see in THE 2016 COSTS OF CONSTRUCTIONS table that a maximum age is set at 50 years by the Thai Appraisal Foundation. Should we then assume that a unit has become largely worthless at 50 years of age, with only the small land value component being retained?

 

How would you incorporate depreciation into your valuations, particularly when considering a purchase of an old unit?

 

 

Concrete can last over a hundred years. Obsolescence is usually from services and finishings, if not replaced.

 

A well located building with high rental demand from high price renters would generate interest for the owners to rejuvenate the building. The opposite is also true.

[hyperdimension]

1 hour ago, trogers said:

A well located building with high rental demand from high price renters would generate interest for the owners to rejuvenate the building.

 

But there would come a time when a building may need to be demolished, possibly by official order due to safety reasons. A building can be rejuvenated only so much over the course of its life, and much of the rejuvenation may only be aesthetics, not structural or foundational. It will have to die eventually. That has been acknowledged by the Thai Appraisal Foundation with their 50 year maximum age and 2% annual depreciation rate as shown in the table.

 

So would it make sense to factor in depreciation into valuation when considering a purchase of an old unit, and how would you do it?

 

Is a condominium an acceptable form of property for passing down to heirs perpetually?

 

[trogers]

1 minute ago, hyperdimension said:

 

But there would come a time when a building may need to be demolished, possibly by official order due to safety reasons. A building can be rejuvenated only so much over the course of its life, and much of the rejuvenation may only be aesthetics, not structural or foundational. It will have to die eventually. That has been acknowledged by the Thai Appraisal Foundation with their 50 year maximum age and 2% annual depreciation rate as shown in the table.

 

So would it make sense to factor in depreciation into valuation when considering a purchase of an old unit, and how would you do it?

 

Is a condominium an acceptable form of property for passing down to heirs perpetually?

 

 

I believe the increase in land value would offset the depreciation of the building, especially in prime areas, for low to mid height buildings.

 

Singapore and Hong Kong have already laid the way to redevelop ageing plots. Thailand will follow. At the moment, no condo building here has reach 40 years yet.

[hyperdimension]

4 hours ago, trogers said:

I believe the increase in land value would offset the depreciation of the building, especially in prime areas, for low to mid height buildings.

 

Let's use the Diplomat Sathorn example with an initial value of 200k THB per square metre for a unit, which includes 1562.5 THB per square metre as the land value component.

If we assume land value appreciates at 10% per year, after 50 years the land value component will have grown to 1562.5 * (1.1)^50 = 183,423 THB per square metre.

If we also assume that there are no precious metals or diamonds in any fixtures, the unit value becomes 0. So an initial investment of 200k THB per square metre becomes 183,423 THB per square metre after 50 years.

So there would be some offsetting of depreciation as you state, but still an unprofitable investment in the end.

If we change the rate of land value appreciation to a more realistic 5% per year, the land value component would be worth only 17,918 THB per square metre after 50 years! An investment of 200k THB turning into 17,918 THB would be quite a large loss.

 

Do you specifically say "low to mid height buildings" because in high-rise building there are far more owners you'd have to share the land value with?

If we halve the number of units in the example, the initial land value component becomes 3125 THB per square metre. After 50 years with a 5% per year land value appreciation, the  200k THB per square metre investment turns into 35,836 THB per square metre.

There would have to be only 17 units on that land plot in order to have a big enough share of the land value for it to grow to break-even after 50 years.

 

I have not taken inflation or rental income into account for the sake of simplicity.

 

Edited January 6, 2017 by hyperdimension

[hyperdimension]

If we want to take rental income into account, let's assume a 5% yield per year. So rental income per year is 10k THB per square metre. Let's assume this is constant every year.

So after 50 years you would have accumulated 500k THB per square metre in income and be left with physical property worth 17,918 THB per square metre.

The return on investment of turning 200k into 517,918 is 159%, which is a 1.92% annual compound interest rate over 50 years (based on the formula annual compound interest rate = e^(ln(517918 / 200000) / 50) - 1).

[trogers]

We are discussing old condo units, those from the early 80s. Most are less than 20 floors high.

 

Land appreciation in the past 10 years is triple.

[trogers]

43 minutes ago, hyperdimension said:

If we want to take rental income into account, let's assume a 5% yield per year. So rental income per year is 10k THB per square metre. Let's assume this is constant every year.

So after 50 years you would have accumulated 500k THB per square metre in income and be left with physical property worth 17,918 THB per square metre.

The return on investment of turning 200k into 517,918 is 159%, which is a 1.92% annual compound interest rate over 50 years (based on the formula annual compound interest rate = e^(ln(517918 / 200000) / 50) - 1).

 

You use compound rate on one side, and a flat rate on the other?

[trogers]

15 hours ago, hyperdimension said:

If we want to take rental income into account, let's assume a 5% yield per year. So rental income per year is 10k THB per square metre. Let's assume this is constant every year.

So after 50 years you would have accumulated 500k THB per square metre in income and be left with physical property worth 17,918 THB per square metre.

The return on investment of turning 200k into 517,918 is 159%, which is a 1.92% annual compound interest rate over 50 years (based on the formula annual compound interest rate = e^(ln(517918 / 200000) / 50) - 1).

 

Use net present value (NPV) to resolve the 50 years of income to today's value, and compare the result with the selling price. Interest rate of 5% seems reasonable.

 

This is how I measure the asking prices of new projects...and then ??

Edited January 7, 2017 by trogers

[hyperdimension]

17 hours ago, trogers said:

We are discussing old condo units, those from the early 80s. Most are less than 20 floors high.

 

Land appreciation in the past 10 years is triple.

 

We don't have to limit discussion to old units. My examples are based on an investment done now and held for an entire 50 year lifespan, which can still be useful to think about.

 

A tripling over a 10 year period is equivalent to an 11.61% annual compound interest rate. So we could use a 5% to 10% value for forecasting purposes.

 

[hyperdimension]

17 hours ago, trogers said:

You use compound rate on one side, and a flat rate on the other?

 

There is no compounding effect with rental income, i.e. each instance of receiving some income does not increase the amounts of subsequent instances.

 

Earning interest from a bank deposit does have a compounding effect if interest is not withdrawn from the account.

 

[trogers]

4 minutes ago, hyperdimension said:

 

There is no compounding effect with rental income, i.e. each instance of receiving some income does not increase the amounts of subsequent instances.

 

Earning interest from a bank deposit does have a compounding effect if interest is not withdrawn from the account.

 

 

Rent is collected every month through that 50 years and can be reinvested in something else to earn an interest or return.

[hyperdimension]

2 hours ago, trogers said:

 

Use net present value (NPV) to resolve the 50 years of income to today's value, and compare the result with the selling price. Interest rate of 5% seems reasonable.

 

NPV is based on the time value of money (a baht earned now is worth more than a baht earned in the future).

 

I didn't take the time value of money into consideration for simplicity, but it is better to do so. We could do that by assuming that you'd deposit the rental income each time you earn it (annually for simplicity) into a bank account that earns interest. I did some work in a spreadsheet and have found that 10k earned each year and always deposited into an account that pays 2% interest annually, you'd end up with 845,794 at the end of the 50 year period. So total bank interest earned would be 345,794.

 

Add remaining property value of 17,918 based on 5% land value appreciation, and you end up with 863,712. That's a 2.97% annualized compound rate.

Add remaining property value of 183,423 based on 10% land value appreciation, and you end up with 1,029,217. That's a 3.33% annualized compound rate.

[trogers]

2 hours ago, hyperdimension said:

 

NPV is based on the time value of money (a baht earned now is worth more than a baht earned in the future).

 

I didn't take the time value of money into consideration for simplicity, but it is better to do so. We could do that by assuming that you'd deposit the rental income each time you earn it (annually for simplicity) into a bank account that earns interest. I did some work in a spreadsheet and have found that 10k earned each year and always deposited into an account that pays 2% interest annually, you'd end up with 845,794 at the end of the 50 year period. So total bank interest earned would be 345,794.

 

Add remaining property value of 17,918 based on 5% land value appreciation, and you end up with 863,712. That's a 2.97% annualized compound rate.

Add remaining property value of 183,423 based on 10% land value appreciation, and you end up with 1,029,217. That's a 3.33% annualized compound rate.

 

So, investing in a newer highrise is not so great after all.

 

Now, try with a capital outlay of Bt7.5m with a monthly rent of Bt45k. Land is one rai valued at Bt320m and the share of land is 1/80.

 

[hyperdimension]

1 hour ago, trogers said:

So, investing in a newer highrise is not so great after all.

 

...unless you timely offload to the "greater fool" when the market's valuation has peaked, just as in financial markets like stocks, long before a condominium's end-of-life.

 

I guess it's a bit of a gamble, unlike owning real permanent land. A house that's built on such land will die one day, but at least the land will retain value (unless it's lost due to extreme circumstances like natural disaster, war, or confiscation by rulers) and can be inherited perpetually by future generations of your lineage.

 

 

1 hour ago, trogers said:

Now, try with a capital outlay of Bt7.5m with a monthly rent of Bt45k. Land is one rai valued at Bt320m and the share of land is 1/80.

 

Is it a condominium? What is the floor area and building age?

 

[trogers]

9 minutes ago, hyperdimension said:

 

...unless you timely offload to the "greater fool" when the market's valuation has peaked, just as in financial markets like stocks, long before a condominium's end-of-life.

 

I guess it's a bit of a gamble, unlike owning real permanent land. A house that's built on such land will die one day, but at least the land will retain value (unless it's lost due to extreme circumstances like natural disaster, war, or confiscation by rulers) and can be inherited perpetually by future generations of your lineage.

 

 

 

Is it a condominium? What is the floor area and building age?

 

 

A condo. Two-bedroom 121 sqm. Thirty five years old at present.

 

Monetary figures given were in 2007, so was 26 years old building at start of investment.

 

 

Edited January 7, 2017 by trogers

[hyperdimension]

Just to confirm, land value was 320M THB and each unit gets 1/80 of that, i.e. 4M? If so, over half of the 7.5M THB cost was for land!

 

Here's my spreadsheet work for this one. I hope table format will be retained in the post.

 

Inputs
Land value (THB)	320000000
Unit value (THB)	7500000
Unit age (years)	26
Unit's share of land as proportion	0.0125
Rental income per month (THB)	45000
Assumptions
Maximum building age (years)	50
Land value annual appreciation rate	5%
Bank interest rate per year	2%
Calculations
Duration of building life remaining (years)	24
Unit's land value share (THB)	4000000
Unit's land value share at end-of-life (THB)	12900399.77
Rental income per year (THB)	540000
Year	Total rental income of year (THB)	Final amount if deposited in bank up to building end-of-life (THB)
1	540000	851525.6027
2	540000	834829.0222
3	540000	818459.8257
4	540000	802411.5938
5	540000	786678.0332
6	540000	771252.9737
7	540000	756130.3664
8	540000	741304.2807
9	540000	726768.9027
10	540000	712518.5321
11	540000	698547.5804
12	540000	684850.5691
13	540000	671422.1265
14	540000	658256.9868
15	540000	645349.9871
16	540000	632696.0657
17	540000	620290.2605
18	540000	608127.7064
19	540000	596203.6337
20	540000	584513.3664
21	540000	573052.32
22	540000	561816
23	540000	550800
24	540000	540000
	Total	16427805.74
Outputs
Unit's land value share + total rental income at building end-of-life (THB)	29328205.51
Annualized compound growth rate	5.85%

Edited January 7, 2017 by hyperdimension

[hyperdimension]

If I change the Land value annual appreciation rate from 5% to 10%, the Annualized compound growth rate changes from 5.85% to 8.72%.

[trogers]

56 minutes ago, hyperdimension said:

If I change the Land value annual appreciation rate from 5% to 10%, the Annualized compound growth rate changes from 5.85% to 8.72%.

 

That's the trick. Old low or mid rise condo buildings in good location. Gives you a steady stream of rental income, and a higher share of the high land appreciation.

[wordchild]

1 hour ago, trogers said:

 

That's the trick. Old low or mid rise condo buildings in good location. Gives you a steady stream of rental income, and a higher share of the high land appreciation.

When I was looking at a condo purchase several years ago i tried to estimate the land value as a % of the sales price. This was exactly what I found, older, low rise condos in central locations offered by far the best value, even though the price psm may have been higher, they were much better value than new builds further out of the central zone.

Back then ( 6/7 years ago) I found several older condos, and even a couple of newer ones where my estimate of the underlying land value per unit was more than 60% of the offered price. There were even a couple of condos where, at the time, they could have been purchased for little more than the underlying land value per unit. Interestingly in one of these "cheap" condos that I identified I found out that the original developer was busy buying any unit in the building that was offered for sale; so they were likely looking at the same thing I was.

Generally, since then, prices have risen but I think broadly it's still true to say that you get much better "value"  in older low rise units in prime central Bangkok (e.g. Ploenchit area) than you get with newer units in less prime areas ( e.g. Past Soi Thonglor)

      

 

 

Edited January 7, 2017 by wordchild

[hyperdimension]

How strange would it sound to directly ask a seller "what share of the land value does the unit have?"

 

If we must determine a unit's land value share ourselves, a problem is that information required to calculate it accurately enough is usually not readily available. Ideally you'd need to know:

• the current real market total land value (or total land area (e.g. in square wah) and real market land value per area);
• all quantities of each unit size offered in the condominium (in order to calculate unit's share of land value = land value *  unit floor area / sum of floor areas of all units)

Land value per area could be found by looking at ask prices of land around the same location. Though it can vary widely depending on many factors (e.g. proximity to main road, or seller simply asking a sky-high price with no real desire to sell any time soon).

 

Quantities of each unit size offered would be even less likely to be available. Would the condominium's juristic person provide such information?

If all units are the same size, number of units could instead be used for an accurate result with the formula unit's share of land value = land value / number of units.  But if there is a wide range and varying distribution of unit sizes, it would only give an "on average" value, and could be very inaccurate to use for a unit size at an extremity.
 

In the case of the Diplomat Sathorn, sizes vary from 40 to 205 m², and a breakdown of quantities and sizes are not provided. The calculated 1562.5 THB / m² as the share per unit is only an on average value and cannot be accurately applied due to the wide range of sizes and no knowledge of the distribution. Also, it was wrong for me earlier in the thread to directly divide 1562.5 by 200k THB / m² since the 1562.5 is per m² of land whereas the 200k is per m² of a unit. I should have also taken some land appreciation into account, since the land was bought 4 years ago. Total land area is given as "1 – 2 – 15 Rai", which is 2460 m², so we can then calculate the total land value. Just for calculation purpose in my spreadsheet, I'll resort to assuming that all units are 205 m². Here then is my spreadsheet for Diplomat Sathorn:

 

Inputs
Unit value per floor area (THB / square metre)	200000
Date of unit purchase	2017-07-01
Number of units on land	192
Land value per area (THB / square metre)	364651.875
Land area	2,460
Unit floor area (square m)	205
Assumptions
Rental yield per year (THB)	5%
Maximum building age (years)	50
Bank interest rate per year	2%
Land value annual appreciation rate	5%
Calculations
Unit value (THB)	41,000,000
Land value (THB)	897,043,613
Duration of building life remaining (years)	50
Unit's land value share (THB)	4672102.148
Unit's land value share at end-of-life (THB)	54837605.51
Rental income per year (THB)	2050000
Total rental income if deposited in bank up to building end-of-life (THB / square metre)	176,004,528.61
Outputs
Unit's land value share + total rental income at building end-of-life (THB / square metre)	230,842,134.12
Annualized compound growth rate	3.48%