Commercial Property Valuations
Valuations for commercial property are required for compulsory acquisitions, inheritance tax, transfer, exchange, and for rent review purposes.
- There are five different valuation methods used by the Royal Institute of Chartered Surveyors (RICS) for valuing property. The main two are the Comparative Method and the Investment Method.
- The Comparative Method uses comparison of similar dwellings with similar rents and yields in the same location.
- For the Investment Method, where the property is let and held for investment purposes, the valuer will compare the rents and other terms and also the yields acceptable to purchasers for different types of investment.
- One needs to bear in mind that even where two buildings are of identical design and construction, one may have been improved or abused in a way the other has not. One may have a better outlook or better position than the other. These so-called minor differences can be critical.
- Furthermore, not all differences are physical. For example, one may be leasehold and the other freehold. Restrictive planning permission, 'bad neighbour' problems, etc may have an adverse effect on value.
- Property is measured not only against similar property transactions but against the returns on other investments.
- Capital value is determined by present and prospective income, a return the market considers appropriate, the lease terms and tenure of property. Strength of the tenant's covenants are also considered.
- For the landlord-tenant relationship to work well, very short terms are impracticable. An expensive lift renewal for example would make the building completely uneconomical for a tenant of a one year lease, whereas much more reasonable for a twenty year lease.
- The tenant will also want a longer term for a more fundamental reason retention of goodwill.
- This is why most commercial leases are for a fairly long term at an initial rent but with provision for a rent review at intervals. For example a 25 year lease with rent reviews every 5 years. At each review the landlord achieves a new rent whilst the tenant is assured of a fixed term until the next review.