Four Ways to get an Accurate Valuation done, it’s important to know that no box is left unchecked in the process. Commercial property valuation is a complex process, and there are many factors involved in a comprehensive, accurate valuation. Getting the process right takes years of experience and training – a lot more than we can cover in a single article.
But we can give you the tools to ensure that you know what to look for the next time you request a commercial property valuation – whether you’re looking to buy or sell a business, considering investing in commercial property, or you need an industrial property or plant valuation.
Sales Comparison Approach
The Sales Comparison Approach to property valuation is probably the most common and most easily understood approach. Essentially, the attributes of a property are considered and assigned a value. Each of these values works together to provide the final property value.
The beauty of this approach is that it is relatively simple to understand – and to implement. Factors for consideration include the location and use of the property, the features it includes, and the area. In short: the attributes that can be measured. The resulting equation is easy for buyers and sellers to understand, and also can be easily explained to municipal agents when calculating rates and so forth.
Touchy-feely factors like charm and potential can’t be quantified and thus don’t form part of this measurement. It’s also important to note that certain features, which may be a definite “No!” for one investor, may shout “Yes!” to another. This kind of thing cannot be quantified in a sales comparison approach, and thus does not form part of the equation.
Capital Asset Pricing Model
Another approach is the Capital Asset Pricing Model, which is more comprehensive than the Sales Comparison Approach. Using this tool, valuers consider the potential risk vs reward ratio of a property. They may investiate the age of the property as it applies to maintenance costs, and weight that against the relatively better developed infrastructure that may come with an older, more established property or area.
This model also considers factors such as potential rental income that could result from a particular property, and what the upkeep of that property could mean in order to maintain a critical mass of occupancy and make the investment viable.
Interestingly, the Capital Asset Pricing Model takes into account the relative value and return on investment of similarly priced investments, such annuities and business investments.
And the issue of crime is considered as well. In countries like South Africa, crime is a significant factor when considering property purchases of any kind, and especially when considering commercial property investment. Staff and clients need to be safe from harm, and equipment and stock needs to be protected from theft. Properties in areas more prone to criminal activity present a higher risk,a nd thus become less viable investments.
Income Approach
The Income Approach to property valuation is really only relevant to commercial property investors looking to realise an annuity income from rental returns once they have bought the property and found tenants for the units available.
In a nutshell, this approach takes into account the monthly repayments on the investment, the potential income recoverable from rentals given a conservative occupancy rate, and the costs of maintenance, levies, and so forth. The difference between these is where the potential value lies for an investor.
It is important that a skilled valuer understand the factors at play in this calculation. They need to be aware of market trends in terms of both occupancy and reasonable rental fees. They also need to skill to be able to assess the quality of the area relative to infrastructure and safety, among other factors, and the quality of the property itself for calculating maintenance and development costs.
Another factor to consider is the legal side of commercial property. Certain areas are zoned for specific economic activities, and some activities may not be allowed in a particular area. This could limit the potential pool of tenants, and thus hamper the property’s earning potential.
Cost Approach
Possibly the most simplistic approach of all, the Cost Approach considers only the value of the property based on what it is actually used for, or what it could conceivably be used for. This approach is usually used to determine the value of vacant land.
The simple sum for this estimate is to calculate the land value and the depreciated value of any improvements or developments that may have been made to the property. Obviously zoning is a factor, since the recoverable amount depends on what the property can legally be used for. Another factor is whether any improvements have already been made – and how useful these might be to a potential developer or investor.
An optimistic approach, proponents of this method usually follow the “best use” scenario and base their calculations on the most value an investor or developer could possibly derive from the property – making it slightly less objective, to our minds.
Rand’s and Sense
Property investment is almost always a smart use of that extra cash needing a good incubator in order to grow. However, since 2008, the property market – and investments in general – have changed significantly. The smart money is on wise investments. And the best way to make sure that your money is well spent or that you’re getting the money your investment is worth, is to get an objective, professional commercial property valuation done.
The Property Partnership provide free quotations and comprehensive, accurate valuations on commercial and industrial property, as well as plant and machinery.