When it comes to valuing commercial property it’s worth having a good understanding of commercial valuations before you approach any property valuation company. This article goes over the calculation methods a valuer uses for a commercial property valuation in Brisbane. For any readers outside the Brisbane area, don’t be alarmed, this guide can still help you become more familiar with commercial valuations.
What is a commercial valuation?
A commercial valuation is a thorough examination and calculation of the worth of a commercial property. A commercial valuer will approach the valuation in a few different ways depending on the purpose of the valuation. In many cases, a commercial property valuation report is ordered before the purchase of a commercial property to ensure the price is worth the investment.
How do I calculate the value of a commercial property?
There are different methods a commercial valuer uses to calculate the value of a commercial property. Here are the two most used valuation approaches:
Cost Approach
The cost approach to a commercial valuation is an investigation of all the attributes of a property and the many variables that influences its market value. A valuer then uses this information to create the hypothetical scenario of replacing the property and determining its cost. The investigation a valuer conducts includes considering the following:
- City/Suburb the property is located
- Proximity to local amenities
- Size of the building and/or land
- Use of the property
- Condition and how well it has been maintained
- Age – including the age of any additions or renovations
- Design and layout
- Construction material
- Zoning Restrictions
Comparison Approach:
To determine the value of a property, a common tactic is to look at the sales prices of comparable properties. These properties must resemble the property being valued, that is, they must be of the same size, be located within a 5 km radius and be the same type of property. The comparable property will share the same attributes listed above and has been sold in the last six months.
A property valuer uses the comparables to determine the average sales price per square metre of commercial property in the current local market and then calculates the value of your commercial property. The calculation will look like this:
Value = Average price per square metre x commercial property size
It may seem simple, but it is a very effective way of determining the value of a commercial property. For the best and most accurate valuation, a valuer uses 3-6 comparable properties and combines this method with other valuation approaches.
How is a commercial property value calculated for rent?
The approaches above are great for purchasing a commercial property which you wish to operate your own business from. If you are planning to rent a commercial property, then the following methods are used for a rent valuation in combination with the methods above so that investors can be satisfied with their purchase.
Income Approach:
Also known as the income capitalisation method of valuation, this approach involves the use of the income a property generates to determine the commercial property value. A valuer will need to calculate the capitalisation rate (cap rate) which is an estimate of the return potential of the investment. The commercial valuer also needs the net operating income (NOI) of the property. This is the operating income of the property minus all expenses, interests, and taxes. The NOI and the cap rate are then used in the following formula:
Value = Net Operating Income / Capitalisation Rate
As the formula shows, the NOI is divided by the cap rate and this will provide a value of the property.
Gross Rent Multiplier:
Comparable properties come back into play in this calculation method. A valuer uses the average sales prices of the property’s comparables and divides it by their average annual gross rental income to find the Gross Rent Multiplier (GRM). The annual gross rental income is the amount the property receives in rent during the year before subtracting any expenses such as taxes, insurance, or maintenance costs. The formula for finding the GRM will look like this:
Gross Rent Multiplier = Average Sales Price / Annual Gross Rental Income
To calculate the value of a commercial property using a GRM, a commercial valuer needs the annual gross rental income of the property being valued and then multiplies it by the GRM. This equation will then look like this:
Value = Annual Gross Rental Income X Gross Rent Multiplier
This is a very quick calculation. Many investors use this as a way of comparing commercial properties before making any commitment to a sale, however, most agencies prefer the use of the income approach as it takes into consideration the operating expenses of the property.
How much does a commercial property appraisal cost?
The cost of a commercial property appraisal depends on several things including:
- The size of the property
- The method/s used by the commercial valuer
- The purpose of the valuation
- The amount of experience the valuer has
- The travel time of the valuer
When choosing a commercial valuer for your valuation, make sure they have been certified by the Australian Property Institute (API). The API sets standards for all property valuation services and their certification will mean that the report you receive will be worth the cost of the commercial property valuation.