Commercial/Industrial Valuation

There are different types of commercial and industrial properties, each having their own valuation complexities. However there are generally two basic types of ownership.

  1. Owner Occupied Properties
  2. Investment Properties

Owner Occupied Properties

This type of property is where an owner of the land and buildings occupies the property with their own business.

Investment Properties

This type of property has a landlord and tenant where the landlord owns the land and buildings which the tenant leases to run their business.

There are three main methods of valuing industrial and commercial property:
  1. Investment Approach
    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 Capitalisation (where income is capitalised at a yield rate into perpetuity taking into account shortfall or surplus rentals) or a Discounted Cashflow 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).

  2. Direct Comparison
    Comparison of the subject to sales of similar properties. This is considered the most appropriate method but generally comparisons are not always available.
  3. 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 principal 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.

    The Investment and direct comparison approach is based on market information whereas the less used method is the Depreciated Replacement Cost which is based on a current cost to replace their depreciated for age, obsolescence and condition. This type of assessment is used more for specialist type properties where there is no market evidence. It also does give a comparison with actual costs in relation to market sales.