Valuation of commercial property: best methods

Commercial property differs from residential in many respects. It includes offices, factories, warehouses, shops and more. In recent years it has grown to include more affordable and manageable options such as student accommodation, hotel rooms and storage units etc.

You can’t get a residential buy-to-let mortgage to buy commercial property. If you are an investor in commercial property then you most probably either invest with cash, or have some form of commercial finance backing. As an example, I own an office building which is financed using a commercial loan from a mainstream bank. What is the main difference between residential and commercial property from a valuation perspective? It is the certainty of the future income stream. Most commercial property is either let on a long lease, or has a high degree of confidence in the occupancy as with student accommodation or hotel rooms.

Fluctuations in the local residential market will not have a direct impact on a commercial property valuation; and values are not negotiable and/or variable as per the residential market.

So how is commercial value established?
Commercial valuers typically choose to value based on gross rental yield. Why gross as opposed to net? Because unlike typical buy-to-let property which comes with expenses such as ground rent, service charges, insurance etc, the gross and net yields of typical commercial property are often very close.

Typically, commercial property is let on a full repairing and insuring lease (FRI) or an internal repairing lease (IRL). These mean the person or company renting the commercial property will be responsible for internal and external repairs and insurances; or, in the case of an IRL, everything from the windows inwards (as per shops in shopping centres, for example). Therefore the only investor expense (other than factoring in loan repayments, if relevant) for commercial would be a management fee, thus keeping gross and net yields close.

And, most importantly, if a lot of distressed property has been sold below market valuein the immediate area, it gets increasingly difficult for the surveyor to separate the true market value from a forced sale market value. In reality, the true market value is going to start falling if there is a concentration of below market value property sales in that area. This is an illustration of how your clever purchase of a distressed property can materially impact the values of property in that area for future vendors!

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>