Valuation

[MICKYG]

Hi all

Does anyone know the formula for valuing a commercial rental property to sell ?

Regards Mike:wink:

[bitingmidge]

The formula I use is to find out what other properties are worth and apply a similar cap rate?

There is no forumula, it depends on the quality of building, and quality of tenant, and quality of lease.

A crappy building on a worthless site in a flood zone with unreliable tenants on a week to week lease might sell at a price reflecting a return of say 12.5% or more, while a prime location, prime tenant and first class building in Hastings Street Noosa say, might only yield 2.5%.

You'd be best to talk to a Property Valuer about your specific situation.

Cheers,

P
:)

[johnc]

It really does depend on your area, here the valuation rate was around 11% when things were really in the doldrums, now with a bit of a shortage of decent property its not hard to get around 7% which is a really big lift. These rates will have absolutely nothing to do with whatever area you are in I might add. Midge summed it up pretty well, and I would suggest you speak to a valuer as well.

[Gingermick]

7% is less than 11% though, could you please tell me how that works?

[Pusser]

A valuer will assess a property using different techniques according to the requirements of the valuation. If you are doing it for an asset valuation it will be more conservative than a market price and differently for a buyer or a seller.

For a buyer it depends on the rate of return required for an investment based on historical returns and outgoings on the property and the expected returns which may be required eg if you have a property with a long term fixed lease returning $100,000 per year and outgoings on rates, maintenance, services etc of 50,000 per year then the expected annual return is $50,000. If the buyer requires a return on investment of 10% then the highest price the buyer should pay is $500,000. If the buyer only requires 5% then the highest price the buyer should pay is $1,000,000. (If you find a buyer who only requires 5% please pm me as I involved in disposing of three caravan parks).

Of course this is complicated by development potential, zoning and how much additional investment is required to maintain the business. The outgoings include the cost of money and opportunity costs. The calculations are complicated by what the buyer intends to do with the property.

For an asset valuation the matter is more complex and takes into account the land valuation determined by comparing with comparable properties in the area and adjustments for leases, easements, quality and quantity of fixed assets, zoning etc. Frequently land values exceed the value of the business being conducted on the property and that is why many businesses are wrapped up and the land sold to developers.

Valuers apply differing comparitive quantative techniqes and produce lenghty reports to justify their valuation. The last three I have had ran to over thirty pages and there was not one simple fomula to apply - mainly a lot of parametric assessments ie this property sold recently for $x per square metre and adjusting for XXXXX then it would be reasonable to expect $x plus y% for market movement.

[johnc]

7% is less than 11% though, could you please tell me how that works?

Mick, the rate of return is simple, say the rent amounts to $10,000 per year, at a 7% capitalisation rate that makes the property worth $142,000 but at 11% the value drops to $91,000. If you look at inner city rental houses the rate is very low, and is at historical lows, which means given time either rents will go up or property prices fall. These things do have a habit of returning to long term averages. I understand that the long term average for commercial property is around the 10%, however I am not confident on that figure and suspect it may be a bit lower.