Commercial property valuation

A commercial property valuation otherwise known as real estate appraisal, property valuation, or land valuation is the process of putting a value on a property. Valuing a piece of property can be tricky, and it’s often necessary for real estate transactions. In order to determine the value of your business or potential investment, you need an appraisal. 

Reasons for a commercial property valuation 

  1. Asset management.
  2. Taxation needs. 
  3. Litigation. 
  4. Statutory purposes. 
  5. Company accounts & audits. 
  6. Expert witness appointments. 
  7. Charity commission matters. 
  8. Pension fund purposes. 
  9. Secured lending valuations. 
  10. Unsecured lending valuations. 
  11. Probate. 

Determining the market value of a commercial property

Location: One of the main factors determining the value of a property will be its location. A good location would be considered one that is close to main retail areas and other commercial properties, otherwise known as a clustered area. Property owners tend to see more benefit from units located in close proximity to other established companies, suppliers (if applicable), and a large staffing pool. If a property meets these criteria it would be known in the commercial world as a “prime location”.  These are usually found in the centre of cities or small towns. 

Income or profit potential: If a property has high income or profit potential it will also be valued higher. Income potential is often based on property size and also location as seen in the previous point. Using the size of a property to determine market value is often applicable to offices and manufacturing units. 

A Surveyor is required to conduct a property valuation. There is no “one way” that a Surveyor will value property as they can choose from several methods- hence why you may receive different valuations from different Surveyors. In some instances, some approaches may be more appropriate for certain properties, hence why the Surveyor will switch between approaches. Nevertheless, the Surveyor will always try to choose the best approach for the client. Valuation methods include:

  1. Cost method: This is the most simple approach to valuation. It is calculated by adding the cost of the land to the cost of the construction of the building. 
  2. Income method: In this valuation method the value is based on the properties cap rate and potential for income/ profits. 
  3. Gross rent multiplier method: Similar to the first method, this method involves valuing the property based on its potential rent per annum multiplied by the gross rent multiplier (determined by the examination of similar properties in the vicinity). 
  4. Sales comparison method: This simple tactic involves analysing similar properties on the market with similar criteria and characteristics to determine value. 
  5. Per door method: This approach is often used when valuing residential apartments that are of the same or similar quality to each other.  Price per door equals the price divided by the number of doors (or apartments). 

Often people confuse commercial valuations with commercial surveys. Although both are conducted by a Surveyor they could not be any more different. Learn more about commercial surveys- link to surveys blog.

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