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How is a Commercial Property Valuation Done

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  • 01-01-2020
How is a Commercial Property Valuation Done

Are you interested in finding out how a commercial property valuation is done? Find out below, the benefits of a commercial property valuation and the methods used to assess its value.

The Benefits of Commercial Properties

There are several reasons and benefits for owning a commercial property. Investors in commercial properties are offered significant advantages. However, it is essential to consider and take into account the cost approach and whether the benefits of investing in a commercial property outweigh the costs.


See below some of the benefits and information:

If you decide to lease your commercial property, you will receive stable rent payments from your tenants. You will accept rental fees for the length of time you choose to rent out your commercial property. If you so choose, these payments could go on for many years, of course, this does depend on the tenant and if you have people wishing to rent your commercial property from you should a tenant decide to leave.

Leasing a commercial property means you also have the benefit of a steady, long term income. Compared to other investments, such as stocks and shares, the level of risk is somewhat reduced.

Investing in commercial property will help you enhance your investment portfolio and provide enough diversification to avoid any market downturns.

Let us say, for example; you decided to invest all your money and time in a residential property, a downturn in the residential property market could leave you in a precarious position. However, if you decided to spread your investments across several areas such as commercial properties, shares and annuities, you will be in a much stronger financial risk position. If one market were to crash, you would still have the other investments to fall back on financially.

Depending on the type of commercial property you decide to invest your finances in, it might also be possible to lease it to two or more tenants. This plan would further spread the risk of your commercial property becoming entirely vacant.

In most cases, the property is considered a sound investment as overtime the property value tends overtime to increase. You are therefore more likely to make an excellent financial return on your investment, as well as the added benefit of income from the gross rents your tenants pay you.

The same can also be said for commercial property, especially if you are proactive in your commercial property management. For example, you need to know how you can reduce your initial costs, increase your yearly profits, and maximise your rate of return.

The relationship between a tenant and the landlord of a commercial property is, of course, business to business. A business to business relationship is more professional than the relationship with a residential tenant. A commercial tenant will most likely occupy your property during business hours only; this would mean far less maintenance call outs late at night.

When you own a commercial property, ultimately you will have control over any office space changes. It will mean that you can make any modifications or alterations as many times as you want while you are the building owner. Any alterations you decide to make could be splitting the space so more businesses can rent single offices or multiple offices. Obtaining planning permission to make changes is usually easier than making changes to residential properties.

This valuation method is used by determining the value of flats or apartments that are of the same build and quality. The total price of one apartment or flat is divided by the number of apartment units or similar properties available to get the value per door or unit. This number is applied to determine a comparable flat or apartment price with a different number of units available. The number of available apartments or units on another property is multiplied to the value per door to get the property's total value.

What are the Methods of Property Valuations?

There are several ways to assess commercial properties' value. Some commercial properties are more suited to specific situations, so you should always consider the purpose of your valuation methods when choosing the one you want to use. For example, you can first work out a property's value in terms of its rental income potential or the properties asking price.  

The five methods for commercial property valuation are comparison, profit, residual, Contractor, and investment. A property valuer will use one or more of these methods when calculating a property's market or rental value. The most common and preferred way to use is the comparison methods because it is directly linked to current market transactions.

The Comparison Method:

Used to value the most common property types such as standard warehouses and offices, shops and houses. Ideally, the property market should be stable, and there should be a multitude of, recent sales comparison approach and lettings of similar properties of the same location, size and location. The best equal factors should be analysed and selected. Afterwards, adjustments can be made for any relative differences. Finally, an estimated market value can be agreed on with you, the buyer and the seller.

The Profits Method:

Can be applied when there are no comparable sale or rental transactions available. This method is often used when valuing nursing and rest homes, hotels, guest houses and pubs. Typically this method would be applied and based on a business or commercial property with an element of (typically a business property with an element of domination within the relevant sector, resulting in a lack of comparable variables. 

This method will estimate the business's gross profits and deduct all operational expenses; this will exclude any rental payments made; this will give the divisible balance, or the amount of capital to be shared between the landlord for rent and the tenant for running the business.

The Residual method:

This method can be used to value a property with the potential for development or vacant land where its current use has been or is being changed to a more profitable venture. When the land value is calculated, you must take the gross development value and then minus the development cost, including any developer's profit. The superfluous sum is then the developer's capital on the property in its amorphous form. This method can be highly inaccurate due to the number of inputs and costs that are challenging and difficult to determine and tend to change over time.

The Contractor's method:

This is a cost method of valuation, and will sometimes be applied when investments, profits or comparative methods cannot be used. This situation often occurs when a property has a specialist field, which means there are no market transactions. The technique assesses all the costs of providing a modern equivalent property, and then adjustments are made to reflect the age of the property in question and square footage. 

This method is quite often referred to as the last resort method due to being so unreliable. The market value is determined by the supply and demand of the economy, and not the production costs. 

The Investment method:

Can be applied to ascertain the market value of a leasehold or freehold interest in a property from its potential to generate income in the future. This method is applied for the primary forms of properties where the tenant provides the landlord with a return on their investment for the capital cost of purchasing the property. 

Using this method, the similar property transactions of lettings and sales are analysed to find the revenue. After that, the profit is applied to the future rental income, which is discounted back to the present day, giving the NVP (net present value). It is an indicator of how much the building is currently worth.

In this valuation approach, the commercial property value depends on the properties cap rate and its potential income. The cap rate is defined as a property's net annual rental income divided by the commercial property's current value. Its equation is the cap rate divided by the net operating income. A market study is conducted to sell similar commercial properties in the same neighbourhood and get the cap rate.

As a general rule, a rental yield of approximately 7% or higher tends to be considered an excellent outcome for a buy-to-let, commercial property. The gross rent multiplier yield is the return on your income before taking away any expenses you incur. It is a useful guide if you're researching several different areas and want to know where is best to invest your money. You will directly compare other regions because the different amounts' landlords charge won't bias the properties' figures.

You calculate the annual rental income and property value x 100 to work out the gross rental yield.

The 2% Rule means that if the monthly rent for a commercial property is at least 2% of the purchase price, it will likely give an excellent cash flow..

Commercial property investment is traditionally seen as an excellent stable investment. The building's initial purchase cost, refurbishing and any alterations to make it ready for tenants, will probably be much higher than if you purchased a residential buy-to-let property. However, the overall returns and profits are likely to be considerably higher too.

If you want to know more about the valuation of a commercial property, then there is a good chance that you are looking to invest in a commercial property. If you are looking for commercial property valuation in Tonbridge, Kent and the surrounding areas, our RICS expert witness can help.