Circular No. 42/2024/TT-BTC Issuing the Vietnam Valuation Standards on Real Estate Appraisal

CIRCULAR

Issuing Vietnamese Valuation Standards on Real Estate Valuation

On the basis of Law on Prices June 19, 2023;

Decree No. The Minister of Finance issues this Circular to repeal Circular No. 118/2013/TT-BTC Pursuant to the Government's Resolution No. 20/2023/NQ-CP dated April 20, 2023, which stipulates the functions, tasks, powers, and organizational structure of the Ministry of Finance;

At the proposal of the Director of the Price Management Department;

The Minister of Finance issues this Circular on the issuance of Vietnamese Valuation Standards on Real Estate Valuation.

Article 1. Along with this Circular, Vietnamese Valuation Standards on Real Estate Valuation are issued.

Article 2. Effective Date

1. This Circular takes effect from August 5, 2024.

2. Circular No. 145/2016/TT-BTC dated October 6, 2016, issued by the Minister of Finance on the issuance of Vietnamese Standard No. 11 - Real Estate Valuation, shall be repealed from the date this Circular takes effect.

Article 3. Implementation Organization

1. Organizations and individuals related to this matter are responsible for implementing the Vietnamese Valuation Standards issued along with this Circular.

2. In the course of implementation, if there are any difficulties, organizations and individuals are requested to promptly report them to the Ministry of Finance for study and resolution.

These Vietnamese Valuation Standards prescribe and guide real estate valuation when conducting valuation according to the laws on prices. These Vietnamese Valuation Standards do not apply to cases of land valuation according to the laws on land.
1. Price appraisers and price appraisal enterprises carry out activities providing price appraisal services according to the laws on prices.

2. Organizations and individuals conducting state price appraisal activities according to the laws on prices.

PART I

GENERAL PROVISIONS

Article 1. Scope of Regulation

3. Organizations and individuals requesting price appraisal, third parties using the appraisal report according to the appraisal contract (if any).

Article 2. Applicability

1. Developable real estate is land intended for construction or land with structures that can be renovated or demolished to construct buildings for optimal and most effective use.

2. The residual method is a valuation method that determines the value of developable real estate based on subtracting estimated reasonable development costs (including investor profit) from the estimated development value (total development revenue) to create such development (total development cost).

Article 4. Approaches and Methods of Real Estate Valuation

Article 3. Explanation of Terms

1. Approaches applied in real estate valuation include market approach, cost approach, and income approach as prescribed in Vietnamese Valuation Standards or their combination.

2. Valuation methods used in real estate valuation include methods belonging to these approaches or combinations of these approaches as stipulated in Clause 1 of this Article. The residual method is a valuation method built based on the combination of the market approach, cost approach, and income approach.

3. Based on the characteristics of the real estate to be valued, the purpose of valuation, the valuation date, the basis of valuation value, and the information and data about the real estate to be valued that can be collected, appropriate approaches and valuation methods should be selected.

RESIDUAL METHOD

2. The valuation methods used in real estate valuation include the valuation methods belonging to or combining the approaches specified in Clause 1 of this Article. The residual method is a valuation method based on the combination of the market approach, the cost approach, and the income approach.

3. Based on the characteristics of the real estate to be valued, the purpose of the valuation, the valuation date, the basis for the valuation value, and the information and data about the real estate to be valued that can be collected, the appropriate approach and valuation method may be selected.

RESIDUAL METHOD

Article 5. Application of the residual method

1. Formula in the residual method:

V=DT-CP

Where:

V: The assessed value of the property;

DT: Total development revenue;

CP: Total development costs.

2. Implementation content:

a) Determine the best and most effective use of real estate;

b) Determine the forecast period for future cash flows (n);

c) Determine total development revenue (DT);

d) Determine total development costs (CP);

d) Determine the value of the real estate (V).

3. Cases regarding the time of occurrence of development revenue and development costs of real estate:

a) Case 1: Development revenue of real estate and development costs of real estate only occur in the same year. At that time, development revenue and development costs of real estate are calculated based on the price level at the time of assessment.

V = DT - CP (at the time of assessment)

b) Case 2: The development process of real estate extends over several years, followed by leasing for business operations or leasing part of it for business operations or selling parts of the real estate over several years.

Where:

V: The assessed value of the property;

DT: Expected development revenue in the first year,

CP1: Expected development cost in the first year;

r : Discount rate;

n : Forecast period for future cash flows;

: Year of forecast.

Article 6. Determining the best and most effective use of real estate

The best and most effective use of real estate is determined based on:

1. Characteristics of the real estate being assessed.

2. Information on land use planning, construction planning, traffic planning, regulations on changing land use purposes, and investment and construction regulations approved by competent authorities.

3. Guidelines for analyzing the best and most effective use as provided in the Vietnamese Valuation Standards on Collecting and Analyzing Information about Assessed Assets.

Article 7. Determining the forecast period for future cash flows (n)

The determination of the forecast period for future cash flows is carried out according to the guidelines in the Vietnamese Valuation Standards on the Income Approach.

Article 8. Determining total development revenue (DT)

1. Total development revenue of real estate is the total expected revenue from the real estate being assessed consistent with the best and most effective use of the real estate.

2. Total development revenue of real estate is determined based on surveys and collection of information on transfer prices, rental prices, and other factors forming revenue (such as sales duration, start of sales, sales ratio, occupancy rate) of at least three similar properties in the area where the real estate being assessed is located or in areas with comparable profitability, technical infrastructure, and social infrastructure conditions, taking into account the trends and fluctuations in transfer prices, rental prices, and other factors forming revenue of the planned investment project in the future. When determining total development revenue, analysis and evaluation of the feasibility, completion, and operation of the project according to the committed investment schedule and current regulations on real estate must be conducted.

The determination of the fluctuation level of transfer prices, rental prices, and other factors forming revenue is based on market survey results or data published by statistical agencies or real estate market management agencies, ensuring consistency with the fluctuations in the real estate market over the years.

3. Total development revenue is determined through either the market approach or the income approach.

a) In the case where total development revenue only occurs in the same year, development revenue is calculated based on the price level at the time of assessment for real estate sold entirely after construction;

b) In the case where the development process extends over several years, followed by leasing for business operations or leasing part of it for business operations or selling parts of the real estate over several years, the conversion of total development revenue of real estate to the time of assessment is carried out using the following general formula:

Article 9. Determination of Total Development Costs (CP)

1. The total development costs of real estate are all necessary development costs anticipated to be invested in the appraised real estate, in accordance with legal regulations (on economic and technical norms, consumption of raw materials and production cost accounting, investment), and meeting the best and most effective purpose of the appraised real estate.

2. The total development costs of real estate include:

a) Construction investment costs including: infrastructure construction costs, construction project costs, other project components costs; equipment costs; construction investment consulting costs; project management costs and related costs;

b) Contingency costs;

c) Business costs (such as advertising costs, sales costs, operation management costs, and other related costs);

d) Financial costs, taxes if applicable (such as asset/real estate usage rental costs);

d) Other reasonable costs;

e) Investor profit determined based on the average profit rate on the market calculated on the total costs (including the initial investment asset value but excluding financial costs) of at least three similar real estate investment projects on the market or determined as the average pre-tax income profit percentage (audited or settled) on the total costs of at least three similar real estate businesses on the market;

f) Compensation and land clearance costs including compensation and resettlement support funds, organization implementation costs for compensation and land clearance not included in the total development costs;

3. These cost items are determined based on investigations, surveys, and collection of actual common cost items of similar real estate projects and market price levels (such as raw materials, labor rates, equipment) at the time of appraisal, in compliance with legal provisions on construction and relevant contents stipulated in the Vietnamese Valuation Standards on the Cost Approach. When market information on these cost items cannot be collected, current regulations of competent state agencies on methods to determine total project investment costs, economic and technical norms, construction unit prices, investment capital ratios of similar real estate projects according to each forecast year consistent with the real estate project construction schedule may be applied; however, it is necessary to argue about the suitability with the purpose and appraisal time and adjust the norms, unit prices, and investment capital ratios (if necessary) before use.

In cases where laws stipulate that the determination of cost items must follow economic and technical norms, construction unit prices, and investment capital ratios issued by competent state agencies, those norms, unit prices, and investment capital ratios shall be used to determine the total development costs of real estate.

4. The determination of total development costs of real estate should take into account the fluctuation values of cost items throughout the entire lifecycle of the real estate project (if any) to ensure consistency with raw material fluctuations throughout the cash flow forecasting period.

5. Total development costs are determined through either the market approach or the income approach.

a) In cases where total development costs of real estate only occur within the same year, development costs are calculated based on the price level at the time of appraisal for real estate after construction and resale of the entire product at the time of appraisal;

b) In cases where the real estate development process spans multiple years and incurs costs, the conversion of total development costs of real estate to the appraisal time is carried out according to the following general formula:

Article 10. Determination of the Discount Rate (r)

1. The determination of the discount rate must reflect the time value of money and the risks associated with cash flows arising during the construction, completion, and operation of real estate projects.

2. The discount rate shall be determined in accordance with one of the following methods:

a) The discount rate is determined according to the income approach method as prescribed in the Vietnamese Valuation Standard on the Income Approach.

b) The discount rate is determined based on the average medium-term lending interest rate for VND deposits at commercial banks that the State holds more than 50% of the charter capital or the total number of voting shares, which have their headquarters or branches within the provincial administrative area at the time of valuation for implementing investment and real estate business projects./.

MINISTRY OF FINANCE