Real estate comes in many forms and types, but commercial real estate can be one of the most exciting. As opposed to residential real estate which is considered a ‘home’ with an attached sentimental value, commercial property is a true investment, and we will discuss commercial property valuations in more detail here.
- Even if a commercial property is fully or part owner occupied, a commercial rent for each square metre of floor area is set 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 and one suitable for the valuation calculations;
- Simplistically, that return can be a gross or net return.;
- 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.
Adopted Yield 7.5%
Valuation Calculation 120,000 x 100
Market Valuation $1,600,000
Now it is worth knowing that this is the short version of events in assessing a market value for a commercial property and that cross checks, or Direct Comparison Analyses are conducted over the body of sales evidence. Establishing dollar value rates per square metre of improved land and/or dollar value rates per square metre of gross or net floor area (GFA or NFA) is standard practice within Australian Valuers.
Sale Price $1,200,000
Land Area 1,500m2
$/m2 Land $800/m2
$/m2 GFA $400/m2
In summary these three 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.
If you have a commercial property that requires a valuation please don’t hesitate to contact us.