Abandoning the surplus land method: A setback in land valuation

According to the Ministry of Natural Resources and Environment, the surplus land method is a way of valuing land that involves calculating the hypothetical total revenue from real estate development and deducting the hypothetical total development expenditures.

According to the Ministry of Natural Resources and Environment, the surplus land method is a way of valuing land that involves calculating the hypothetical total revenue from real estate development and deducting the hypothetical total development expenditures.

Calculating the hypothetical total revenue of real estate requires assumptions about future transfer and rental prices, selling time, sales rate, trends, and price changes of transfers and rents. It also necessitates utilizing the bank's borrowing interest rate to discount cash flows to the valuation date.

The calculation of hypothetical total development costs takes into account not only the standard rates and unit prices issued by the competent state agency, but also construction time, annual construction rates, contingency costs, loan interest costs, investor profits considering risk factors, advertising and sales expenses.

However, due to the complexity of calculating the assumptions for total revenue and total development expenditures, land values are unpredictable and imprecise, resulting in major inaccuracies and possible hazards for individuals involved in land valuation and decision-making at the local level.

Furthermore, investors typically utilize the surplus approach to measure the advantages of an investment by assuming income and expected expenses while making investment decisions.

Thus, the ideal situation would be for land prices to be constant and predetermined; however, using this method in state management of land valuation causes land prices to be dependent on revenue and cost estimates, resulting in inaccuracies and allowing room for misuse in determining land prices, resulting in losses to the state budget and potential legal disputes with citizens and property owners.

These assumptions are susceptible to the land valuer's subjective opinion and the information gathered in the context of our real estate market, which is volatile and opaque, making these assumptions less accurate and not entirely representative of market principles.

Despite the Ministry of Natural Resources and Environment's justifications, many experts view the proposal to eliminate the surplus land approach in land assessment to be a step backward.

Abandoning the surplus land method would be a step backward in land valuation.

According to Nguyen Van Dinh, a real estate legal expert, there are five land valuation techniques under Decree No. 44/2014/ND-CP on land prices: direct comparison method, deduction method, income method, surplus method, and land price adjustment coefficient method.

Except for the land price adjustment coefficient method, which is unique to Vietnam, the other four methods are considered advanced, modern, in line with international standards, and similar to real estate appraisal methods based on Ministry of Finance appraisal standards.

"The four land valuation methods are considered advanced and modern tools," Dinh explained. The issue with land valuation work is not so much a lack of methodology as it is a lack of trustworthy data (actual land values and real estate transaction prices). These figures can be thought of as 'input sources' for land assessment."

He also stated that the present database is insufficient and untrustworthy (due to residents' habit of dual pricing to evade taxes), which affects the accuracy of land value findings and is deemed improper for the market condition.

If the excess land method is abandoned, as proposed by the Ministry of Natural Resources and Environment, the question of how to value land while transferring it to investors for project execution emerges. Currently, the surplus approach is used to calculate land prices in the majority of real estate projects, including land use rights auctions, where the beginning price is decided using the surplus method.

"Ditching the surplus method would be a setback in land valuation work," Dinh stated emphatically.

Many experts have already indicated, in agreement, that abandoning the surplus approach is detrimental to the development of the real estate market in particular and the economy in general. It would be a tragic error that would jeopardize the country's recovery and excellent development prospects.