Commerical and Industrial Property Valuation
There are different types of commerical and industrial properties, each having their own valuation complexities. However there are generally two basic types of ownership.
(a) Owner Occupied Properties
(b) Investment Properties
Owner Occupied Properties
These types of properties are often designed and established to fill a specific need or requirement with regards to their business. Generally these buildings are specialised to a particular occupier and as a result they often have a high replacement cost and lower investment value. A valuer has to consider when valuing such a property, the alternative uses i.e. can it be easily filled by another tenant or business. Some buildings have no other use beyond that which they were designed for and their life can be dependent on the economic soundness of the occupier.
The majority of commercial and industrial property is bought and sold on an investment basis. Most owners are concerned with the rental income stream and capital gains. Generally investment properties are valued on three methods:
This is where the buyer looks to receive a capital return on outlay in the form of rental income together with capital value increases resulting from regular rent reviews. It is generally accepted in the marketplace that the most appropriate and widely used market based method of valuation for commercial/industrial properties is the investment approach.
Within this method there are two models - Income Capitilisation (where income is capitlised at a yield rate into perpetuity taking into account shortfall or surplus rentals) or a Discounted Cash Flow Analysis (forecasts future cashflows over a period - generally 10 years and estimates the value at the end of the period and then discounts it back to the present day).
Depreciated Replacement Cost
This approach involves the estimation of the land and building components of the property as separate valuation figures and the summation to provide an indication of market value. It is based on the principle of substitution relying on the theory that a prudent purchaser is influenced in arriving at a suitable price by the cost to construct a comparable property less depreciation and obsolescence.
Comparison of the subject to sales of similar properties. This is considered the most appropriate method but generally direct comparisons are not always available.