Commercial and industrial property valuation

The market for commercial/industrial space is driven by both micro and macro economic conditions – which impact upon business activity. The sales of commercial/industrial assets are handled by commercial real estate agents who typically charge a commission on sale. Valuation of these assets can be required for various reasons, including:-

• Mortgage
• Stamp duty/capital gains tax
• Asset realisation/acquisition
• Financial reporting
• Superannuation reporting

Purchasers within this market segment comprise owner occupiers either expanding business operations or upgrading premises along with investors seeking capital appreciation and an investment yield.

In most instances, commercial/industrial space is valued using either a Capitalisation or variation of a Direct Comparison Approach. When determining value, a valuer will, in most instances, utilise two (or more) approaches.

International Valuation Standards (IVS) 2007 details the definition and application of valuation approaches for valuation reports as follows:-

Valuations of any type, whether undertaken to estimate market value or a defined non-market value, require that the Valuer apply one or more valuation approaches. The term “valuation approach” refers to generally accepted analytical methodologies that are in common use. In various States these approaches may be referred to as “valuation methods”.

Market based valuations normally employ one or more of the valuation approaches by applying the principle of substitution, using market-derived data. This principle holds that a prudent person would not pay more for a good or service than the cost of acquiring an equally satisfactory substitute good or service, in the absence of the complicating factors of time, greater risk, or inconvenience. The lowest cost of the best alternative, whether a substitute or the original, tends to establish Market Value.

Value is inherently linked to specific attributes of a respective property, including but not limited to, the following:-

• Land features including topography and vegetation
• Location features including exposure, proximity to services and surrounding development
• Building features such as functionality, age and condition
• Occupancy features, i.e. whether the property is owner occupied or tenanted Lease terms and conditions

The inherent features of the subject property (being valued) are compared to properties of a similar nature that have transacted in the market place. When applying a capitalisation approach, the ‘capitalisation rate’ is determined based upon investment yields (returns) of similar property. The capitalisation rate (or investment yield) reflects the level of return the market will accept, based upon the perceived risk of the investment. In terms of a direct comparison approach, market sales evidence is utilised to compare specific attributes of these properties to the property being valued.

It is important to note that there are many other factors considered in applying value to a property. The above commentary is designed to provide the reader with an overall snapshot of the process involved in valuing commercial/industrial properties. For further information, please contact Commercial Valuations Manager, Luke Chadwick.

Luke Chadwick

Ph: (02) 4305 5408

Mb: 0432 867 521

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