COMMERCIAL PROPERTY VALUATIONS
Assessing market value
Commercial Valuation
Commercial real estate can be one of the most exciting, is a true investment and can be assessed in two main ways (among others);
In summary these two methods, where appropriate provide a good balance valuation approach to any commercial property valuation and in turn gives you the client the comfort that the job has been completed properly and accurately. You then have a well-researched and reliable valuation assessment that will meet your desired purpose.
Market Value - Income Approach
- A commercial rent for each square metre of floor area is assessed as the basis of return to a Landlord or Lessor;
- In commercial property valuations, this rental, gross and/or net, is checked against market rental evidence to test if the rental is a fair market rental;
- That means the Landlord, under a gross rental agreement(s) pays all of the recoverable outgoings (rates, land tax, repairs & maintenance etc);
- Under a net rental agreement, the tenant pays the recoverable outgoings.
- An example of a non-recoverable outgoing might be Land tax, which the Landlord cannot pass onto the tenant. As Commercial Valuers it is our job to establish exactly who pays what and to calculate the Net Annual Income (NAI) that the Landlord receives in any one year.
- That NAI, once calculated forms the basis of the valuation assessment;
- The figure is then capitalised at a market acceptable yield. A yield is the demonstrated return on investment that investors of comparable commercial property have accepted in the purchase of a property within the nearby area.
NAI: $120,000
Adopted Yield: 7.5%
Valuation Calculation: 120,000/0.75
Market Valuation: $1,600,000
Market Value - Comparable Transactions Method
The comparable transaction method can use a variety of different comparable evidence, also known as units of comparison, which form the basis of the comparison. For example, a few of the many common units of comparison used for real property interests include price per square metre, rent per square metre and capitalisation rates.
The key steps in the comparable transactions method are…
(a) identify the units of comparison that are used by participants in the relevant market, (b) identify the relevant comparable transactions and calculate the key valuation metrics for those transactions,
(c) perform a consistent comparative analysis of qualitative and quantitative similarities and differences between the comparable assets and the subject asset,
(d) make necessary adjustments, if any, to the valuation metrics to reflect differences between the subject asset and the comparable assets
(e) apply the adjusted valuation metrics to the subject asset, and
(f) if multiple valuation metrics were used, reconcile the indications of value.
An example of valuation metrics are:
Sale Price: $1,600,000
GFA (Gross floor area): 1,000m2 -
$1,600,000/1,000
$/m2 GFA = $1,600/m2