How to Determine the Market Value of Commercial Property

Building a property portfolio can be a popular choice for investors, with the overall profit potential being one of the most significant advantages. Historically, the residential property market was always the most popular choice for investors, but things are starting to change. More investors are seeking opportunities in the commercial property space.

It’s estimated that the UK commercial property market is worth around £680 billion, with commercial properties spread across industries such as apartment building, retail, leisure, and industrial. Other sectors of this space include hotels and accommodation for university students, which has snowballed over the years, which means it’s more appealing to investors. 

The advantages of commercial properties

There are many different perks for investors who are looking to get into commercial properties. A landlord of a commercial business renting out to another company will be a relatively stable source of cash from the rental income - your cash flow will be improved. 

Purchasing a property rather than renting one will also mean that buyers can enjoy capital growth over time, meaning their overall portfolio becomes diverse and appealing. However, the thought of taking the dive into commercial property purchases can be a daunting one without the proper knowledge of what constitutes a good deal. 

You’ll probably notice that properties aren’t bought or sold openly like a residential property, so you’ll need to bear in mind that there are no quoted prices to use as a comparison to know whether or not you’re paying the right price. This can be unnerving for those who aren’t up to date with the residential property. Still, it shouldn’t be a reason to prevent investors from enjoying the commercial property experience and the returns that can be had in this sector. 

The comparable valuation method

Advantages 

This method involves comparing the property in question and comparing it to similar properties elsewhere. It’s important to note that the property’s location is essential for this technique to be accurate. You’ll need to compare the properties fundamental values such as age, size, and interior layout. 

With this method, you’ll be able to identify any significant selling points of the property. With all of this information, the valuer can then decide based on actualities rather than their own experiences in the market. The comparable method is a value of residential property that is probably the most straightforward one, and this is why it’s so commonly used and popular.

Disadvantages 

It is important to remember that a few comparable methods can be a little unrealistic, and they can’t be ruled out. To make this method more accurate, there needs to be enough detail provided about the commercial property to ensure a valuation is reached. The lack of data may produce a limited or skewed valuation. Attempting to value a property with no detail is likely to be pointless.

In some instances, the uniqueness of a property can cause problems. The individual features can be appealing, but it may be challenging to hold these priorities to any type of assessment without precedent. So in this circumstance, there may be a better option of acquiring a valuation. 

The profits method

If it is impossible to provide a valuation for a commercial property in the conventional way, profits may be used. 

Requirements

The profit method requires properties with businesses actively operating within them, such as pubs, bars, restaurants, guest houses and hotels. Other leisure centre properties like cinemas are examples of where the property method can be helpful.

The comparable method is usually the go-to technique, but the profits method is preferred for property investors and surveyors. This is particularly true in the case of profit-driven businesses that carry out the bulk of their trade and custom on-site. One main reason for the profit method is that the external factors are considered in the comparable method despite the aesthetic similarities. This is because so many more elements work to influence the ultimate profit potential of business premises. 

How to value the commercial property with the profits method

Before going down this valuation method, it is vital to ascertain the business’s financials currently occupying the property. Usually, lenders will require access to your business’s financial accounts, and these will cover 3 years of operation, but more comprehensive financial statements are always helpful. 

Once you have the records, you’ll need to spend some time scrutinising them. Providing the financial accounts for those occupying the business are accurate and well maintained, the valuer should be able to determine the overall financial standing, how well the business has performed in the past, and how well the company is performing today. 

Upward trends are a good sign. One thing to watch out for when gathering financial records is the delay on the part of the occupying business with providing the relevant documents and references. If an accountant on the business side has failed to deliver in time, it might signify that the information may not be entirely accurate. Investors looking for peace of mind are advised to use professionals when calculating the values with the profit method. They’ll also be able to spot any erroneous activity and record keeping. 

Profit method calculations 

In summary, gross earning are the overall yearly revenues made by the business. However, these earnings don’t include other costs. It’s just the amount generated by a company before anything else. 

Gross profit

This shouldn’t be confused with gross earnings. Gross profit is the final figure after the purchase costs have been subtracted from gross revenues. Purchase costs refer to all the expenses that are essential for daily business operations. So, if we used bars and pubs as an example, this may include drinks and food items. 

Working expenses

Another financial factor to consider is the working expenses, which refer to the daily workings of a business. This will cover anything from fuel bills, line rental, broadband costs and business rates. 

Net profit 

This is the figure that remains after everything has been deducted. This is the figure that most investors will likely want to know more about. Once you have this number, you’ll know how much profit is in the business you’re looking at. The net profit for the profit made should give you a strong indication of whether a commercial property will be a wise investment. 

Business rents

If you’re thinking about renting out a property as soon as you’ve bought it, you’ll want to calculate an annual rentals figure. Typically, you’ll need to divide your net profit sum attained from your profits attained by two. 

Whatever prospective property type you're looking at valuing - whether it be a multi-tenant property or a special use property - an accurate real estate property valuation will be essential. Rangewell can provide everything you need to know in order to make an accurate valuation. 

Commercial property advice 

If you’re looking to expand your portfolio to include commercial properties but are unsure whether you’re getting a good deal, Rangewell can help. We work with expert brokers in the commercial property valuation sector, and we have extensive experience in the property market. Our specialist team can help you decide if your dream property is definitely worth the risk of whether an alternative option will be better. 

Whether you need help determining a value for commercial property or are looking for general advice about commercial properties and the market, or you just want to discuss one of our services. Get in touch with Rangewell today, and we’ll be more than happy to talk to you about capital investment, investment portfolio, and other commercial investment opportunities.