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Valuation of commercial property

Thomas Miller
31.01.2023
5 min

What is a commercial property valuation?

Buildings and land classified as commercial property are those whose primary use is business rather than apartment building, or residential property. Examples of these properties are: 

  • offices, 
  • retail stores, 
  • shopping centres, 
  • warehouses, 
  • factories, 
  • hotels, 
  • pubs, 
  • restaurants, 
  • cafes, 
  • sports facilities, 
  • medical centres, 
  • hospitals, 
  • nursing homes, etc. 

The process of valuing or obtaining an estimate of the worth of business property at the time of valuation is known as commercial property valuation.

How to value a commercial property

There are several ways to value your commercial property. Here you will find ways to value that business of yours:

Cost Approach

The cost to completely rebuild the structure is taken into account by this valuation approach. It is considered together with the expenses of construction materials and other charges that would be incurred if the existing structure were to be replaced.

It is simply adding the cost of the land on which the property was built, and adding the construction cost to it. The cost approach also adds any additional cost that was incurred after the property was built; like renovation costs.

Sales Comparison Approach

It is also termed the market approach and it heavily relies on recent sales data for comparable properties. For example, a 10-unit office building might be compared to another that was sold in the same area just a few months earlier.

Income Capitalization method

This approach is based primarily on the amount of income an investor can expect to derive from a particular property.

For example: Let's say a building costs £2 million, and local market analysis predicts a 10% yield. The £200,000 projected income could be increased by eliminating waste or charging the tenant for additional expenses like water or electricity use. The present value of all anticipated future income is adjusted for discount.

Value per gross rent multiplier

The Gross Rent Multiplier (GRM) valuation method calculates a property's potential value by dividing the purchase price by the gross rental income. 

In other words, your GRM would be approximately 6.67 or £1,000,000 / £150,000 if you bought a commercial property for £1,000,000 and it produces £150,000 in gross rents annually.

Value per door

This commercial property approach method is used primarily on multiple-unit buildings rather than single-unit structures. It simply determines the worth of the entire building based on the number of units. A building with 12 units priced at £3 million would be valued at £250,000 ‘per door’ irrespective of the size of each unit.

Cost per rentable square foot

Usable square footage and shared spaces like stairwells and elevators that tenants can use together make up rentable square footage. Using this process, you may estimate the cost per rentable square foot, compare it to the average lease cost per square foot, and determine the building's value.

For instance, a building with 20,000 rentable square feet and an average annual rent per square foot cost of £15 will give a 12% gross rental return at a £2.5 million acquisition price. 

A further expansion on how it was calculated is as follows:

  • 20,000 rentable square feet
  • The annual price per square foot is £15 (£1.25 per month)
  • Hence by multiplying 20,000 by £15, the annual price for the entire rentable square feet becomes  £300,000.
  • Then dividing  £2.5 million by the entire rentable square fee (£300,000) becomes  £300,000 /  £2.5 million = 0.12
  • Then converting it to percentage will be 0.12 multiplied by 100 = 12%
  • The gross rental return = 12%

Commercial Property Valuation calculator the UK

Getting your commercial property value calculated here in the UK is a simple business. Many online tools give easy but comprehensive value to that business of yours in less than 5 minutes. A few pieces of information are generally needed from these online tools to help calculate the value of your business property

  1. First is to enter your address and your relation to the property.
  2. The friendly user interface then proceeds to ask how fast you need your commercial property to be sold.
  3. A perceived value of the worth of your property is asked and note that it does not influence the valuation process.
  4. Details like your name, email address, and mobile number are then requested.
  5. Immediately an SMS verification code is sent to your mobile number to receive your valued report.

The Cost of Commercial Property Valuation

To find the cost of your commercial property:

  • To start, divide the property's net annual rental income by the building's estimated worth, which you determined using sales of nearby similar properties.
  • This gives you the capitalisation rate (rate of return).
  • Then you take your net operating income and divide it by that figure.

Example:

  • Net Annual= £500,000 
  • Estimated building value= £3,000,000
  • Cap rate= £3,000,000/£500,000 = 6
  • Operating income annually = £900,000
  • Then the cost will be = £900,000/6 = £150,000

Commercial building valuation report

Every commercial building valuation report must consist of the following:

  • General information about the owner.
  • Address, PIN, and location (any landmark) of the concerned property.
  • Property type for lodging.
  • Dimensions of the relevant property.
  • Council information on zoning and building design
  • A description of the location and condition of the building.
  • Unique characteristics of the subject property.
  • The number of bathrooms and rooms offered.
  • The neighbourhood and society are described.
  • Availability of public transportation.
  • Quality of building materials.
  • The subject property has flaws.
  • Required improvements.
  • Standards for building construction.
  • Facilities and extras related to the analysed property.
  • Images in the colour of the property as of late.

Below is a summary of some important issues concerning the valuation of commercial property:

  • Investigate the value of other similar properties in your vicinity to help give you an insight into the worth of your property.
  • Remember that the quality of your property can greatly affect the worth of your property. Avoid inferior materials in the construction of your property.
  • Cost per rentable square foot factors in every usable space by the tenant which can go a long way to getting a higher value on the property.
  • The value per door approach may have its defect when using it to evaluate multiple units as it disregards the size or surface area of the building space.

FAQ

How much does an RICS (Royal Institute of Chartered Surveyors) registered valuer cost?

The price of an RICS valuation by a certified surveyor should range from £150 to £800 depending on your property's size, value, and location.

What occurs if the valuation is less than the UK offer?

The amount of money your buyer's mortgage provider is willing to provide will change if they value your apartment or home, less highly than the accepted offer. This is so because the size of the mortgage a buyer is eligible for depends on the lower purchase price or the lender's value.

What is the typical return on commercial property in the UK?

As of May 2022, the industrial multi-let, distribution, and London West End offices markets have the lowest prime yields in the UK (at 3.25 per cent, respectively). 7.5 per cent of the population was in shopping malls, in comparison.

Thomas Miller
Thomas Miller has been a real estate agent for over 4 years now, when he is not in the field, he is dedicated to his second passion, writing, especially in the real estate market.
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