So, you have decided to invest in commercial property and want to know its true value. It’s a tough task and can be difficult to undertake alone. The best course of action if you are looking for a commercial property valuation Sydney is to hire someone with the right expertise to know exactly how to approach your valuation so that the report has the information you need.
Commercial property valuers can approach your valuation in 4 ways. Each of these commercial property valuation methods serves a particular purpose and has its advantages. It is important to have a fair understanding of each method so that you can ensure you hire the right valuer and that your commercial property valuation report has the value you’re looking for.
The right valuer can do more than just a valuation for commercial property. If you so require, you can hire a specialised valuer to perform a plant & machinery valuation. This sort of valuation provides the value of your commercial property and assets. These assets would be involved in the operation of your business and may also be valued using similar methods.
4 Ways to Determine the Value of a Commercial Property
1. Cost Approach:
The cost approach toward finding the value of the commercial property is essentially a sum of all the costs and the qualities of the property that lend to its value. This could be any number of things and may require a valuer to thoroughly inspect the property. Inspections are required when the information in a valuer’s database is insufficient or out of date, but it could also just be their personal preference or method.
With this approach, a valuer will have to consider such factors as:
- The architecture and design of the property.
- Its size and shape of the building or structures and the amount of land included in the property.
- The location of the property and its distance to amenities such as public transportation, cafes, shops.
- The parking availability of the property, whether it is a shared garage, private on-site parking, or street parking.
- The condition of the property and its age.
These factors among many others are analysed by the valuer. They then determine how each factor affects the property value and use that to form the final commercial property valuation.
2. Direct Sales Comparison Approach:
The direct comparison approach focuses on market data and properties that are comparable to yours. These properties must match the subject in every way to be considered a true comparable. Just like the Cost Approach, the valuer will have to consider the property’s many qualities but this is so they can find the best comparable properties.
Properties that surpass yours in some form or another, such as being larger in size or having been recently renovated, will be considered a superior comparable. If it is the opposite and the property that is being compared to yours lacks in quality or is missing a feature, then it will be considered an inferior property comparable. A valuer will always aim to find a comparable that truly matches yours, but commercial properties can differ in several ways. Adjustments will be made accordingly if an inferior or superior comparable is being used in this approach.
This approach can be best used for pre-sale or pre-purchase advice, rent reviews, loans or tax purposes.
3. Income Approach:
The income approach is one of many capitalisation methods of determining property value. It focuses on the potential income the property can generate for its investor. This is a common method for commercial properties as many property investors want to be confident that their investment will be worth the cost.
When using the income approach a property valuer will need to calculate the capitalisation rate of the property. This rate presents the investor with the property’s rate of return, which will be shown as a percentage. This percentage is then used in the formula to find the property’s value which is:
Commercial Property Value = Net Operating Income/Capitalisation Rate
The Net Operating Income (NOI) is a figure that does not include interests or taxes. To find the NOI the following formula is used:
NOI = Real Estate Revenue – Operating expenses
Revenue can be generated from such things as rent, vending machines, and parking fees. Operation expenses are necessary expenses such as taxes, insurance, repairs, and maintenance fees.
4. Gross Rent Multiplier Approach:
Like the income approach, the gross rent multiplier (GRM) approach is a capitalisation method valuers use to calculate the value of a property. This commercial property valuation is based on rental income generated by the property. That is essentially the main difference between these two methods, the income approach uses the net income and the GRM approach uses the gross income.
The formula used in the GRM approach to finding your commercial property value is:
Commercial Property Value = Annual Gross Rental Income X Gross Rent Multiplier
For this, of course, you will need to have the GRM. This can be easily calculated by looking at the sales price that has been listed and dividing it by the annual gross rental income.
This is a simple way of determining a commercial property’s value, so long as you have all the information you need to calculate the value yourself. Of course, for the best and most accurate results, consult with a professional commercial property valuer.
How do I Know Which Valuation Approach is Right for Me?
If reading about each approach has led to more questions than answers, then consulting with an expert commercial property valuer is the next move. It is important to note that a commercial valuation report is not limited to a single approach. Many approaches can be combined to form a custom property valuation report. Of course, this will all depend on the why. This article focused on the how for determining your commercial property value, but it is important to know why you need a commercial valuation.
Once you have discussed with a valuer why you need a commercial property appraisal, then they can determine the correct method or methods that would suit your situation. With both the why and the how the valuer will be able to give a quote for the commercial property valuation cost.
There are many different commercial valuation services available in NSW. If you would like advice for your commercial property valuation consult with one of our valuers. We’d be more than happy to help you determine the best way to approach your commercial property valuation. You can write to us via our contact form or you can call us on (02) 8599 9899.