Abstract: Income reduction method is the most commonly used and important method for income real estate appraisal. However, because it is difficult to determine the interest rate reduction, it is difficult to determine whether it is accurate and scientific, which leads to certain restrictions on its application. By analyzing the commonly used methods to determine the interest rate reduction at present, the optimization method of determining the interest rate reduction by compound adjustment method is obtained.

Keywords: composite adjustment method of real estate appraisal reduction rate

Real estate appraisal is a complex economic activity. In order to make the appraisal activities efficient, accurate and fair, we must pay attention to the rigor and scientificity of the activity process. Real estate appraisal income method is one of the most popular asset appraisal methods in the world. It is an appraisal method to discount the future income of real estate and find out its current market value by using the time value principle of funds. However, in practice, the income method has some difficulties. The central difficulty is to determine the future net income and capitalization rate, especially whether the capitalization rate is accurate, which will greatly affect the authenticity and objectivity of the evaluation conclusion drawn by this method. Therefore, when using the income reduction method to evaluate the real estate value, the accuracy of the reduction rate has an important impact on the accuracy of the valuation results.

Nature of reduction rate

Because the real estate has the characteristics of fixed location, non-renewable, personalized and sustainable, and has the dual attributes of investment and consumption, when users occupy a real estate, the real estate can not only provide them with the current net income, but also expect to continue to obtain it in the next year. Therefore, buying real estate can be regarded as an investment, and the price of real estate can be regarded as the capital invested after several years of income from buying real estate. The price of real estate depends on the expected income that can be obtained, which leads to the real estate valuation income method. The basic formula of income reduction method is:

Income price = annual net income/reduction rate (if annual net income is equal and uncertain)

Reduction rate is a kind of return rate of capital investment, or called return rate, return rate, profit rate, profit rate and interest rate, which is used to reduce the net income of real estate to the ratio of real estate price. The essence of interest rate cuts is reflected in the following aspects:

The reduction rate will vary with the location and use of investment real estate and change with time.

The interest rate reduction must be positive. If the reduction interest rate is less than zero, it means that the real estate investment income is lost and the annual net income cannot be obtained, then the application of the income reduction method will lose its foundation and the calculation will be meaningless.

The lowest interest rate cut must be higher than the bank's time deposit interest rate or the national debt interest rate for the same period, otherwise the investment income will not be higher than the funds deposited in the bank or purchased national debt, so it is not economical.

The reduction rate is directly proportional to the investment risk. If it is expected that there will be a high inflation rate in the future, or the future annual income of income-generating real estate is risky, speculative, capitalized and the house price is low. Vice versa, that is, the future income of real estate is more certain, or there is no obvious inflation rate, then the capitalization rate is lower and the house price is higher.

When using the income reduction method to evaluate the real estate price, the accuracy of the appraisal result depends on the appraiser's determination of the net income and reduction rate, especially the reduction rate, and its small changes will have a great impact. It is more important for appraisers to choose a suitable reduction rate. Determining a reasonable price reduction range is the key to accurately calculate the real estate price.

Common methods for calculating reduction rate

There are many viewpoints to determine the reduction interest rate, such as: market extraction, average bank interest rate, loan interest rate, interest rate of capital investment in interest-bearing securities, safe interest rate plus risk adjustment rate, capital appreciation rate (opportunity cost rate), interest rate obtained by mortgage and free capital combination method, general interest rate, rent-sale ratio, etc. Each of the above viewpoints has its own characteristics, and its interest rate calculation also has its own emphasis. Theoretically, real estate appraisers can get satisfactory results by reasonably choosing different appraisal items, but in practice, this is based on appraisers' full understanding of the market, and it is not easy to do this.

In the process of determining the reduction rate, there are many influencing factors, mainly including the proportion of self-owned funds, foreign interest, depreciation and income reduction caused by depreciation or functional decline, real estate appreciation and income increase caused by inflation, and the increase of self-owned funds after repayment. In addition, risk compensation, tax exemption policy, real estate type, location, years, lease, structure, etc. also affect the reduction rate, so the influencing factors of real estate reduction rate are very complicated and difficult to determine, and it cannot be simply replaced by bank interest rate, which requires appraisers to make full use of their professional knowledge and wisdom to determine a reduction rate closest to the real estate market price.

This paper systematically expounds several calculation methods of reduction rate commonly used in practice and their comparison.

(A) market extraction method

This method is suitable for the mature and active real estate market, and the market rent and transaction price are easy to collect. This method is intuitive, easy to understand and accept, and has high accuracy. Generally speaking, the calculation is divided into finite annual reduction rate and infinite annual reduction rate. The calculation of finite annual decline rate is complicated and can be solved by step-by-step approximation iteration method. It is worth noting that when the market rent (income)/price ratio method is used to calculate the reduction interest rate, the selected market example must be similar to the real estate to be evaluated, that is, it is required to be the same or similar in the use, structure, function, rights and interests of the same supply and demand circle recently. In addition, in order to avoid errors caused by contingencies, it is necessary to extract several similar real estates and find the arithmetic average or weighted average of the ratio of net income to price as the reduction rate of the real estate to be evaluated.

The disadvantage of this method is that it needs rich market information and many comparable examples, and it can only be applied after the appraisers correct some special trading situations, so the calculation is more complicated. In addition, the construction conditions and operation period of each comparative example may be different. In addition, the future income years of real estate sold in the market cannot be exactly the same, and lowering interest rates is related to the future income years. If the future income years of the appraised object are different from those of comparable examples, the reduction interest rate obtained is not practical. Moreover, for this method, many domestic appraisers believe that since there are comparable examples in the market, it is better to use the market comparison method instead of the income method.

(2) accumulation method

Cumulative method, also known as safe interest rate plus risk adjusted value method, is a widely used method in evaluation practice. Its theoretical basis is that investors must get corresponding rewards to invest; Its starting point is to choose a risk-free return on investment, which is the so-called safe interest rate. If foreign countries think that the interest rate of US Treasury bonds is close to risk-free, China often takes the one-year fixed bank deposit rate as the safe interest rate. Plus various adjustments that are not as good as safe interest rates. Generally speaking, there are three factors: additional investment risk, insufficient liquidity and management burden. We can get the rate of return required by investors, and subtract the expected rate of income growth, we can get the rate of real estate reduction.

The disadvantages of the safe interest rate plus risk adjustment method are: first, the choice of safe interest rate lacks certain criteria; Secondly, China's deposit and loan interest rates often change, which has a certain impact on real estate prices; Thirdly, the determination of the added value of investment factors has a certain subjective component, and the actual risk level of the real estate market is usually difficult to determine. In addition, with the different rights and interests of different regions, different types and the same real estate, the actual risk interest rate is different, so the results are different.

(C) rate of return on investment ranking insertion method

The ranking insertion method of investment return rate is to find out the relevant investment varieties and their returns, compare and judge according to the degree of risk, judge the risk level according to experience, and then rank and analyze various interest rates to get the returns. For example, the bank's one-year deposit rate is 2.52%, the one-year national debt rate is 2.72%, the corporate bond income is 5%, the one-year loan rate is 5.85%, and the investment stock yield is 12%. Considering that the risk of investing in real estate is greater than the risk of one-year bank loans but lower than that of investing in stocks, its yield should be higher than the one-year loan interest rate but lower than that of investing in stocks, and the downward adjustment can be determined to be 5.85%.

This law grasps the relationship between income and risk of real estate and other investment assets (bank deposits, loans, national debt, insurance, corporate bonds, stocks and related fields) from a macro perspective, and its premise is to determine the income of other investment assets, which the author boils down to the income and risk of various investment assets. In the competitive and orderly investment market environment, the ranking insertion method of investment income is a desirable method, but when real estate speculation increases and a real estate bubble appears, we should carefully grasp the ranking of interest reduction in various investment income. In addition, as mentioned above, the data range between 5.85%- 12% is still relatively wide, which has a great influence on the appraisal results. Therefore, this method relies very much on the experience of the appraiser and requires high quality of the appraiser, so it is difficult to make a scientific explanation of its final value.

(4) income risk multiple method

The income risk multiple method is an improved method of the safe interest rate plus adjustment value method on the basis of referring to the investment return rate sorting insertion method, that is, the risk adjustment value required in the safe interest rate plus adjustment value method is changed to an additional multiple, which is used to determine the annual recovery amount of real estate investment and safe investment. Because the risk of real estate investment is higher than that of national debt, the yield of real estate investment should be higher than the annual interest rate of national debt in the same period. The specific idea is: assuming that the total price of profitable real estate purchased by real estate investment is V, the service life is N, the capitalization rate is R, and the annual net income is A. At the same time, if the investment amount is P, the term is N, the annual interest rate is I, and the annual interest recovery amount is A, there are:

v = a/r×[ 1- 1/( 1+r)n]

p = a×( 1+I)n- 1/I×( 1+I)n

Because the risks and benefits of real estate investment are greater than those of national debt investment, if the two investments are equal and the return period is the same, then the annual return (net income) of real estate investment is greater than the principal and interest recovery of national debt investment. Assuming that the annual recovery of real estate investment is multiple of B higher than the principal and interest recovery of national debt investment, there are:

a=( 1+b)×A

Because V=P, there are:

( 1+I)n- 1/I×( 1+I)n =( 1+b)/r×[ 1- 1/( 1+r)n]

This formula is the basic formula for determining capitalization rate by income risk multiple method, where b is called income risk multiple. Using this formula, as long as I and n are known in advance, the capitalization rate R can be determined according to the multiple of income risk. The key of this method is to determine a reasonable multiple, which depends on the experience judgment of the appraisers.

(E) Compound investment rate of return method

This method takes the weighted average of the mortgage yield and the return on self-owned capital as the reduction rate, and calculates it according to the following formula:

R=M？ RM+( 1 m) RE

Where: r- reduction rate (%); M- loan value ratio (%), the ratio of mortgage loan amount to real estate value; RM—— mortgage loan interest reduction rate (%), and the ratio of the first year's principal and interest payment to the mortgage loan amount; Re-normal rate of return required by self-owned capital.

The premise of its use is to determine the mortgage interest rate of real estate financing, the return on investment of its own funds and its proportion in the total value. To maximize the return on investment, the proportion of mortgage loans to the total value has a reasonable value, which is generally between 60% and 70% in China. This value is not as high as possible, too high will bring debt risk. Once all the parameters can be reasonably determined, an objective and reasonable capitalization rate can be obtained. But just as it is difficult to determine the risk compensation, it is difficult to determine the rate of return of self-owned capital investment (property right investment). In addition, according to this formula, if the loan-to-value ratio is assumed to be 0, then the reduction interest rate is equal to the required rate of return on its own capital, which is obviously unrealistic.

(six) industry benchmark rate of return plus price index adjustment method

The premise of determining the capitalization rate of real estate in this way is to regard real estate as an investment. Suppose you invest in a real estate at P price (net capital outflow), and you can get a net income (net capital inflow) every year. Suppose A is constant every year, and the period of income is n:

FNPV = a/( 1+R)[ 1- 1/( 1+R)n]-P

Where FNPV is the financial net present value and r is the discount rate.

Let FNPV=0, then:

R=FIRR (financial internal rate of return)

When FIRR & gt；; RC (industry benchmark rate of return), fnpv >；; 0, investment in real estate can obtain excess profits; When FIRRC, fnpv

This method is simple and feasible, has a certain theoretical basis, is relatively accurate, and is widely used at present. However, the disadvantage of this method is that it only calculates the general reduction interest rate of real estate, and it is necessary to adjust this general reduction interest rate to the specific reduction interest rate of real estate to be evaluated by other methods.

Optimization of calculation method of reduction rate

The above six methods for determining the reduction interest rate are all popular at present, but some of them have some unreasonable defects, some of which cannot fully reflect the essence of the reduction interest rate, and some rely too much on the experience of appraisers. The author summarizes the determination process of reduction rate in practice, and on the basis of analyzing the essence of reduction rate, integrates several factors that have great influence on reduction rate, and makes necessary compounding and correction with each other to get the required reduction rate. Details are as follows:

(1) Step 1 to determine the reference reduction rate.

Select the one-year national debt interest rate as the benchmark to reduce the interest rate, and clarify the profitability of reducing the interest rate; Select the average profit rate of the industry as the revised value of lowering the interest rate, reflecting the investment attribute of real estate; Take the average of the national debt interest rate and the average profit rate of the industry, and determine the interest rate reduction at a certain point (reference point) as the benchmark interest rate reduction. The formula is as follows:

Benchmark interest rate cut = (one-year bond interest rate+industry average profit rate) /2

For example, if the interest rate of one-year national debt is 2.72% and the profit rate of real estate industry is 12.2%, then the benchmark reduction range =(2.72%+ 12.2%)/2 = 7.46%.

Because these two items are supported by official approval or ready-made data of industry statistics, it is generally easier for appraisers to determine the value of benchmark reduction rate.

(2) The second step is to revise the price index.

Query the real estate price index at the appraisal time, and compare it with the price index at the reference time to get the price change (expressed as a percentage) between the appraisal time and the reference time, and use this value as the price adjustment coefficient to get the revised value of interest rate reduction at the appraisal time.

For example, if the real estate price index on the base date and the appraisal date are 65,438+003.6 and 65,438+026.7 respectively, the revised depreciation rate on the appraisal date can be obtained according to the results of the first step = 7.36% × (65,438+065,438+06.7/65,438+06.

This data does not depend on the appraiser's experience, and can be calculated according to the authoritative housing sales price index and land transaction price index.

The third step is to adjust the risk.

According to the principles of low land risk, high real estate risk, low residential risk and large commercial space, the appraisers judge the risk of the real estate to be evaluated, get its risk adjustment value, and determine the final interest rate reduction.

Example: Assuming the risk-adjusted value is 0.5%, it can be deduced that the final reduction rate is 8.29%+0.5%=8.79%.

We call this method "compound adjustment method". It can be seen from the above steps that the compound adjustment method not only takes into account the scientific nature of determining the reduction rate, but also embodies the artistry of determining the reduction rate. The basis of the first step and the second step is not from the appraiser's experience, but from the existing authoritative data, and the operation is simple and clear; The third step reflects the influence of risk on the reduction rate, and the reduction rate before risk adjustment value is actually close to the final result, which invisibly reduces the difficulty coefficient of appraisers in determining the reduction rate in practical work.

Of course, real estate appraisal = science+art, and appraisers must have rich experience to make accurate and reasonable judgments. No matter which method is used to determine the reduction rate, it must be verified with the evaluation experience in order to evaluate the real estate price more accurately.

References:

1. Management height. Discussion on the theory and method of real estate yield and real estate appraisal [W]. Appraisal Expert Network, 2006

2. Lu Lifu. Some thoughts on the evaluation of capitalization rate (reduction rate) [W]. Appraiser Information Network, 2006