Intrinsic value method: how to calculate the real value of a property

1. How is the value of a property calculated using the intrinsic value method?

The intrinsic value method is also referred to as the real value method. It allows you to calculate the material value of a property. The starting point is the question: what would it cost to purchase the property in its current state? In this cost-oriented approach,

• the value of the land on which the property stands and

• the fair value of the property are determined and added together.

2. Calculating the intrinsic value: how does it work?

The intrinsic value method is the sum of the land value and the fair value of the property on the land. The fair value is calculated according to the volume in cubic metres multiplied by the construction costs per cubic metre.

As a general rule in Switzerland, you can expect to pay around 800 francs per cubic metre of building volume. Depending on the fit-out standard, this number can vary considerably, especially upwards. An amount for the depreciation of age is deducted from the construction costs.

A market comparison is used to determine the land value. Experts use comparative values from as many property sales as possible in the area.

The effective market price is not relevant when calculating the intrinsic value. It only plays a role for the land. The intrinsic value may therefore differ from the market value.

The following formulas are therefore important: 

• Fair value = new construction costs + ancillary costs – depreciation of age

• Fair value + land value = intrinsic value of the property

3. When is the intrinsic value method suitable for valuing property?

Especially in the case of properties with special characteristics (such as luxury properties, properties for certain enthusiasts, very old houses and properties with a larger proportion of land), it is difficult to determine the value of the special characteristics. The intrinsic value method is suitable for these cases. The value determined is particularly conclusive for building insurance.

When is the intrinsic value method unsuitable?

The intrinsic value method does not take into account the current demand for the specific property. The real value of the property determined may therefore differ significantly from the effective market value.

Banks therefore usually base their mortgage lending on a hedonic value. This valuation method is closer to the price that is expected to be achieved when the property is sold.

4. How does the intrinsic value method differ from other property valuation methods?

The intrinsic value method calculates the replacement value of the property. The market situation is not taken into account.

With hedonic valuation, on the other hand, the market is the basis for calculating the value. The price of the property is compared to as many similar properties as possible. This is how a fair market value is determined.

The capitalized income method considers the return to be achieved. The focus is on the question: what return can be achieved with the property through rent?