Am I paying too much for my commercial property?
With strong market conditions in Australia as we enter the pandemic recovery phase, commercial property is thriving and proving a quality choice for investors.
But on the back of so much volatility and uncertainty in the last year or so, now it’s even more important to ensure you’re buying commercial property at the right price. You want to get bang for your buck and ensure your investment portfolio position will be strengthened.
So, it’s crucial that all investors know how to accurately value a commercial property. If you don’t know how to work out whether or not you’re getting the right deal, read on.
What determines the value of a commercial property?
The property type will significantly impact the value, especially depending on the current market trends. For example, now in post-COVID times, storage, industrial and pharmaceutical-based commercial properties (among others) are still in high demand and therefore increasing in value, especially compared to the likes of retail and travel-related real estate.
The property size is equally important and will not just consider the overall size of the premises, but the size and shape of the physical property, the surrounding area, building configuration and ratio, and the land to building ratio.
As with any purchase, the age and condition of the commercial property will also largely define its value. You’ll be more inclined to pay extra for a well-maintained property with modern facilities and other supplementary benefits (for example depreciation benefits), as opposed to an old, neglected building that needs plenty of maintenance and upgrades.
Remember, you’re purchasing so much more than just a building. Look at what other assets are included in the premises and what the intended use is. Are there any recently installed facilities or technologies in place that would be valuable to a business? Does the property come with large storage or car parking space? Or perhaps it has significant surplus land that that allows for future expansion and development. All these factors will boost the value and worth of the overall property.
Location and exposure
The value of location and exposure will often depend on the intended use of the commercial property. For instance, real estate designed for non-discretionary and discretionary businesses will ask a much higher price when it’s in prime, accessible locations with high foot traffic and exposure.
Potential for growth
Look at what is happening in the surrounding area that may impact the potential for capital growth. Is there infrastructure development planned that will increase the accessibility, demand and value of the property? Alternatively, there could be a predicted shift in demographics or population growth that will increase the need for a particular service that can be facilitated by your commercial property.
How to calculate the value of a property
There are three types of valuation methods or approaches investors will use to find the property value: income capitalisation, direct sales comparison, and summation cost method.
The income capitalisation approach is based on an investor’s expected net income from the property and is most commonly used by commercial property investors. The value is calculated by assessing a fully let net income, before making allowances for vacancy, letting up periods, expenses and statutory and operating expenses. An appropriate capitalisation rate is then applied based on comparative yields achieved on other similar investment grade transactions in any given asset class or market.
The direct sales comparison or market value approach compares the sales data of comparable properties that have recently sold in the market place. These findings are then used to create a value range which can be adjusted to a specific number based on your particular property (for no two properties are exactly the same).
Finally, the summation cost method uses the current value of the property taking into consideration the combined total value of the land and building rates.
When it comes to selecting the right method, remember all three have their limitations and should be used depending on your unique situation and the information you have access to. There’s no point in using the income approach if you don’t have sufficient data to determine the net income, while the direct comparison approach will be ineffective if there are no comparable sales.
The best option is to work with a buyer's advocate who can provide you with the best advice on a property’s value, based on knowledge on the local market and understanding of the latest trends. A property expert can also help you with the entire valuation and negotiation process, to ensure you get the best possible deal.
Contact us to discuss your needs. No obligations.
Managing Director, Broadway Property
Director, Broadway Property