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How Is A Commercial Property Valued?

Whether you are buying or selling, it is essential to have an idea of how commercial properties are valued. There are many factors that contribute towards the value of commercial premises, of course, but the major one is the potential for income generation.

Differences to the residential market

Unlike most residential properties, of which there are probably several similar in size and value near to each other so they can be directly compared, it can be difficult to use this method to come up with a value for commercial properties. Commercial properties may have very different sizes, layouts and purposes to each other.

That’s not to say that this approach is never used. Certainly when initially looking to buy or sell a property it can be helpful to scout around the local (or regional) area to search for comparable properties. Once sales figures have been obtained for a few properties, look at the square footage, the property’s function, and any rental data if available.

estate-agentsLocal estate agents, as well as local landlords and business owners, may also be sources of information in this regard. Finally it can also help to look at auction sales. This kind of information gathering is helpful in building up a picture of the types of commercial properties around, their sales and rental values, performance of the local economy, and the supply and demand for such properties in the area.

Market conditions

Bear in mind at all times that the property’s value is always based on market conditions and what any buyer is willing or able to pay. Rents may not always accurately reflect current market conditions. Certain properties may have a different value to different buyers; some may attract a premium because a buyer is willing to pay more, for example, to expand a current business.

NOI

valuationPutting a valuation on a commercial property by calculating its potential for income generation is easier when you have the figures. The net operating income (NOI) is the key component here.

This is the company’s working income once working expenses have been deducted. It does not take into account income tax and interest. If this figure is a negative value it is referred to as a net operating loss (NOL). So simply add together all the income and minus the operating expenses. Note that this figure is before any mortgage has been paid.

Working out the figures in this way gives buyers a clearer indication of the value of the property because, once the annual income has been calculated, this can be converted into a percentage. If a buyer is looking for at minimum a 10% annual return on a NOI of £50,000, then they might value the property at £500,000.

Increasing the income generation pushes the valuation up. The minimum return required by a buyer here is referred to as a capitalisation (cap) rate. 10% is a typical figure but again this may fluctuate according to the market, so it’s worth doing some research and contacting a local broker to clarify local conditions.

So while factors such as location, square footage and function very clearly pay a part in valuing a commercial property, essentially the valuation will come down to the property’s current income and potential future income.

This article was contributed by PropertySales.com, the market-leading directory of commercial property for sale from online media group Dynamis.

Image Courtesy: thecommercialblog.com, heywoodsproperty.co.uk, movehut.co.uk

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