Commercial Property Valuation - London
Commercial Property Valuation – when, why and how?
Retaining an independent surveyor to carry out a commercial property valuation when you are considering an investment in commercial real estate, or when you decide to sell it can have enormous benefits. It can help you make the right decision and secure a safe deal, meaning that you save time and money while procedures are smooth and easy. A commercial property – such as a shop, office or industrial unit are asset classes that are incoming producing primarily owned and asset managed by investors to provide a return based upon their risk appetite. The numerous purposes of a commercial real estate valuation can include loan security, sales, development, taxation, property insurance, or charity act.
Why Harding Chartered Surveyors?
At Harding Chartered Surveyors, we aim to be direct, open, and honest. As members of the Royal Institution of Chartered Surveyors (RICS), we must abide by strict ethical standards. We benchmark ourselves against the client feedback we receive. We deal with complex matters but interpret all the jargon for you to give you a common-sense opinion.
Our surveyors are always more than happy to spend time discussing matters with you.
Our RICS Chartered Surveyors comply with stringent guidelines and use 60 years of combined experience to provide accurate commercial property valuations in London.
Contact our professional and RICS registered valuers to arrange the valuations that will save you time and money, and make the whole procedure smooth and easy.
Different Commercial Property Valuation Methods
There are different commercial property valuation methods that can be implemented to determine the current market value of a commercial real estate. The three main approaches are the cost approach, the income approach, and the sales comparison approach. These valuation methods are different to the method an estate agent would use to calculate the market value of a real estate. To make sure that you are provided with an accurate figure, the surveyor you have retained has to opt for the right valuation method.
The cost approach valuation method
The value of a residential property is determined largely by its condition, but the value of a commercial property is determined by several other factors such as location, its potential to generate a rental income, floor plan and amenities. If your investment property is a new building, valuation might be simpler as it generally involves the construction cost and the market value of the land. In case of an existing property, however, appraisal becomes more complicated. Construction costs and market land value are factored in, but reduced by physical deterioration, structural and functional obsolescence, or by any external factors from the surrounding area such as extreme traffic, pollution, or anything else that would affect the operating income of the property. This appraisal method also factors in the useful economic life of the building, and the time that elapsed since the property was placed into service. Generally, it is difficult to use this method on anything other than a new structure.
Sales comparison approach
This method uses comparable sales data from similar properties that have been sold recently, and are similar in age, location, and overall property quality. So, data such as differences in sale date, geographic location, building age, square footage, and proximity to other landmarks are used to calculate an appropriate value. This approach works well when you have had a lot of transaction activity in your market within the last 12 months. But the less transaction activities you have in your market, the less useful this method is.
The income approach
If the cost approach and the sales comparison approach aren’t sufficient to come up with a valuation, a third method that is used in commercial property valuation is the income approach valuation method. Within the income method there are three main sub-methods. The first is the gross rent multiplier approach. This involves dividing sales prices of comparable commercial real estates by the gross rent that those properties are going to generate on an annual basis. This is going to give you a number that you can apply to the gross rents of your specific commercial properties. Often this isn’t all that helpful since most properties are going to have different expense ratios.
The second income approach method that is used is the direct capitalisation approach. In this method, instead of taking the gross operating income, you are taking the net operating income of the property into account. This is just applying a market-appropriate cap rate to a net operating income value, and taking that net operating income and dividing that by the market cap rate. The way valuers will come up with a market cap rate is they take comparable sale data, calculate what the cap rate was on those sales, and then apply that data directly to the subject commercial property. So if several inferior properties sold for a 6 per cent cap rate and the subject property that they are analysing is in a better location and slightly newer, they may apply a lower yield to the subject property.
The third income approach method is the discounted cash flow method. This includes forecasting net cash flows over a significant period of time – usually somewhere around ten years – assessing what the assumption will be for the sale price of the real estate at the end of the hold period. This is followed by taking the net cash flows, revenue, expenses, capital expenses, and projected sales proceeds when you assume to seal the deal, and then applying a discount rate to discount those cash flows to produce a valuation for the property.
When do you need a Commercial Property Valuation?
- In case of considering a property investment, since you need to know the current market value of the commercial real estate you choose to invest in.
- Lenders need loan security, so when your business is looking to secure funding from a bank, you will need a commercial property valuation so that the lender knows that your real estate is worth enough to cover the outstanding loan as a collateral.
- When your lease expires, and your landlord is trying to make a claim for repairs, and you don’t want them to claim for repairs for more than the property value has decreased.
- When you are taking out a mortgage, buying a leasehold or a share in a commercial property and you need to pay Stamp Duty.
- If you decide to sell your commercial real estate, the Inland Revenue will require a formal written valuation to calculate any Capital Gains Tax due.
- When you are entering into a loan agreement and the lender wants to make sure that their loan is secured because your real estate is worth enough to cover the outstanding loan as a collateral.