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Calculate the value of a commercial property

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  • 11-05-2020
Calculate the value of a commercial property

The valuation of a property is carried out by experts in commercial real estate. The reason for an evaluation is to work out how much the property is worth for future sale, insurance purposes, or to work out its potential rental value.

How do you calculate the value of a commercial property?

Valuation of properties can fluctuate enormously due to the economy demand, popularity of the area and development plans in the area. For example, if there are plans for a new tube station or a large commercial venture is about to open locally.

These factors can cause the valuation to increase suddenly, and in certain instances, some factors can cause the valuation to double. In the same way that property values can increase, they can also decrease due to local factors, such as the crime rate of an area, or more rural places.

This page will give you more in-depth details on how to calculate the value of a commercial property, and what factors are involved in the process. If you require any further information, please get in touch with a professional.


Examples of Commercial Properties

Commercial property are buildings that have been designed for a business to make a profit. This profit can be made from the income the business makes, or by renting out the building.

Examples of commercial properties include:

  • Retail

  • Cinemas

  • Restaurants

  • Offices

  • Gyms

  • Garages

  • Beauty and Hairdressing Salons

  • Warehouses

  • Exhibition Centres

  • Hotels

  • Nightclubs

  • Care Homes

  • Medical Centres

  • Shopping Centres

What factors do you need to consider?

To determine the value of a commercial property, you must think about the following factors. These factors will either increase or decrease the property value and also will affect the demand for the business, including:

Location

For a high-value commercial property, location is very important. A good location consists of surroundings, accessibility, on a well-known route, and a reasonable amount of space. For example, being around restaurants, cafes, shops and other attractions, having a large area for parking and having an easy and noticeable entrance.

Income

If the commercial property has a high potential income, then this adds value. The potential income of a property can be based on size, location, land, the market value of similar properties, the potential rental income, and the type of property. A lot of data from research goes into this factor.

Comparables

Similar buildings to the property in question are used as a comparison to work out an average. The buildings must be in similar locations, similar sizes and similar surroundings. This means that the valuation will be based on existing properties, making it fairer and giving you a better indication.

Rental Potential

If the property surveyor believes that the building will have a high rental demand, then the value of the property will increase, as this will generate a profit. The potential rental income must be calculated, which involves using the gross rent multiplier and finding out the annual gross rents of similar properties.

Features

How much the commercial property is valued at will also depend on the features of the building. For example, the square footage of the building, amount of land, garden area, facilities, car park space, well-known surroundings, interest in the business you are offering around your local area, occupancy and the ability for extensions and conversions.

Expenses

Another factor you must take into account is the expenses; for example, how much it will cost to set the business up, employ and pay staff and buy the necessary equipment. Next, you must think about the running costs of the property, such as business rates, energy bills, water rates, internet access, telephone line rental, possible TV licenses and maintenance costs.

Similarities and differences between commercial and residential properties

Differences

Valuing a residential property and valuing a commercial property has many differences. For example, with residential properties, you are thinking about the tenants and their requirements. In contrast, with commercial properties, you are thinking about all the potential customers and features they would expect and what would encourage them to use the facilities on a regular basis.

Similarities

Both of these valuations involve a lot of research and knowledge of real estate experts and also include finding similar property types with the same features and location. Also, they could both be bought by an investor, who would make the investment of the property, add more features and make money on selling it in the future.

commercial property Calculation

There are a variety of methods used to calculate the value of a commercial property. Here are a few of the different calculations:

Method One

This method is based around the potential income of the commercial property. For this, you need to use the NOI (Net Operating Income), which is the annual income of a building, without including the expenses and running costs.

Calculation: Net Operating Income ÷ Cap Rate

Method Two

This method is based around other sales of properties in the same location and similar features. To do this, you need to list the features of the commercial property and find comparable properties with the same features that are currently on the market. Find the values, and this will give you an indication of the worth of the commercial property.

Method Three

This method involves working out the potential rental value of the commercial property. To do this, you need to find other properties with similar features in the same location and find their rental values.

Calculation: Annual Gross Rents x Gross Rent Multiplier

Method Four

This method involves working out the existing costs of the commercial property itself. For example, how much it has actually cost so far, and how much it cost for the land the property was built on.

Calculation: Cost of the Land + Cost of the Construction of the Building

Edward Prentice Ltd

Here at Edward Prentice based in Kent, and we offer our services to our surrounding local areas. Our company is regulated by RICS (Royal Institution of Chartered Surveyors), and have had many years of experience in the industry, gaining invaluable knowledge. 

If you would like to find out more information about the services we offer or need some advice, please search for our website, or contact us today via our phone number or email. Your calls are very important to us, and a member of our team will always be happy to help you as much as they can.