Should the surplus method be abandoned in land valuation?

As the most popular method and clearly reflecting the financial nature of real estate projects, the elimination of the surplus method is a step backward in land valuation, causing long-term consequences for the supply and real estate market, according to experts.

Commenting on this issue, Dr. Nguyen Tien Thoa - Chairman of the Vietnam Valuation Association said that this is not wrong, but only partly correct. Because the more important part is that when allowing the type of land with development potential to achieve the highest and best use goal, the state must also know the land price according to market principles to achieve that goal, as a basis for determining financial obligations between the state and organizations and individuals using the land. And the appropriate method to price that type of development land is the surplus method.

“ To determine the price, it must be based on legal grounds (planning, licensing...) and available objective market data, not baseless calculation data ,” Dr. Thoa emphasized.

Experts say that the surplus method should not be abandoned in land valuation.

Discussing this aspect further, a real estate legal expert said that the surplus method clearly reflects the financial nature of a real estate project: what is the cost, what is the revenue, what is the profit, very scientific and objective. This method clearly reflects the way to exploit, allocate, and share the "land rent difference". This is also a modern real estate valuation method, according to international practice.

“ The drafting agency believes that due to the lack of database for valuation, valuation must be based on hypothetical factors, lack of accuracy, so abandoning this method, in my opinion, is not convincing. If the problem is the lack of database, the solution must be to create a source of quality, reliable database, instead of abandoning the surplus method (destroying the production machine). Therefore, if abandoning the surplus method becomes a reality, it will be a step backward in land valuation work ,” he commented.

The surplus method should be kept.

With the proposal to eliminate the surplus method, the draft Decree amending Decree 44 only has 3 methods: comparison, income and land price adjustment coefficient. However, it can be seen immediately that these 3 methods are not enough to replace the surplus method when valuing land with potential for development.

Specifically analyzing, experts pointed out 3 shortcomings. Firstly, determining land prices is based on the purpose of use with potential for future development, not based on the current purpose of use as the comparison method and income method are calculating.

Second, land types with common development potential do not have similar, similar assets that have been successfully traded on the market to apply the comparison method (with the condition that there must be at least 3 comparable assets, except in exceptional cases), so the comparison method cannot be applied for valuation.

Third, the income method is a method that determines future income with the assumption that income is stable, permanent, and the risk of future income is fixed. Meanwhile, the residual method is completely opposite. Therefore, the income method cannot be used to replace the residual method.

According to the real estate legal expert, if the surplus method is eliminated, a gap will appear in land valuation. “ What method will the state agency use to value land when allocating land to investors to implement projects without auction? Currently, the vast majority of real estate projects, when allocating land to investors, state agencies apply the surplus method to value land (except for some low-value land funds that apply the adjustment coefficient method); even in the case of auctioning land use rights, the starting price must be determined according to the surplus method .”

Commenting further on this issue, Professor Dang Hung Vo, former Deputy Minister of Natural Resources and Environment , said that it is necessary to remove the land price adjustment coefficient method from land valuation methods and maintain/add the surplus method to value real estate development projects on land.

Accordingly, the land price adjustment coefficient method is simply a multiplication between the value on the land price list regulated by the provincial People's Committee and a coefficient also decided by the provincial People's Committee. "The land price suitable for the market is an objective quantity, it cannot be required to be equal to the product of two subjective quantities regulated and decided by the provincial People's Committee. Thus, it can be concluded that this is a method of determining land prices without any scientific theory", affirmed Professor Vo.

The Prime Minister recently issued a telegram requesting the Ministry of Natural Resources and Environment and leaders of provinces and cities to quickly remove difficulties and obstacles in land valuation. In particular, there is an important content that the Ministry of Natural Resources and Environment must submit to the Government for consideration and promulgation of a Decree amending and supplementing Decree No. 44/2014/ND-CP regulating land prices before July 31, as well as completing the amendment and supplement of Circular No. 36/2014/TT-BTNMT detailing methods for land valuation, construction, adjustment of land price tables, specific land valuation and land price consultancy.
However, according to experts, the amendment of Decree 44 and Circular 36 has major shortcomings, which will lead to significant consequences for land valuation as well as the development of the real estate market. That is, the drafting agency has eliminated the surplus method in land valuation, which is the most practical method and has a complete, stable, and transparent input information database.

Hai Anh

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