Commercial Ip Valuations?

OK. Ive been pondering over this recently and thought it be time to ask everyone their experience/opinions.
Which factors/variables have the greatest effect on valuations of commercial property? whether established or new developments?
Some of them i see being:
1 UCV, the unimproved capital value of the land beneath the development must play a part in overall valuation.........doesnt it?
2 Location, whether its coastal, cbd, regional, village, capital city and the community within those areas ie industrial estates etc.
3 Type, the structure or purpose of this development has to be taken into account, ie shop,warehouse,workshop,mini-storage development etc
4 Construction cost, does this effect/play a significant role in the overall valuation?
5 INCOME, this is the one most constant factor ive found in the evaluation of the com ips ive looked at.Usually surrounding at capitilisation rate of approx 10%, ie $20k pa income gross,$200k valuation of property, or somewhere thereabouts.........
Or am I overlooking something else?
Thanks in advance for your replies regards add.

Commerial Property Valuation 101

OK add,

Here goes, Commerial Property Valuation 101..

Commercial (generally defined as offices and retail) and Industrial (warehouses, factories etc) property is valued very differently to residential property.

What you buy is an income stream (or a potential income stream if it is currently vacant) as well as an option to redevelop at a later date.

There are really only two components of a commercial valuation, the income stream (rental) and the capitalisation rate (the return as a percentage).

IF the rent is $20k pa and that is a going market rent (the rent reflects such things as in items 2 & 3 of your post, in short the level of the rent reflects the demand) and the capitalisation rate for similar properties is 6% then the value of the property will be $330k. Adjustments will be made if a property is under rented or over rented, has other options etc (but these are covered in Commercial Property Valuation 201 & 301).

The capitalisation rate is based on sales analysis. If a similar property sold for $350k and it was rented at $22k pa then it shows a passing yield (or cap rate, just another term for the same thing) of 6.3%. Now this sale will be analysed by valuers and adjustments will be made when they are applying their cap rate to a property (or income stream) that they are valuing. Your location factors (point 2) are also included in the capitalisation rate.

Of prime importance in the whole Commercial property valuation process is the lease. This reflects the security of tenure (as well as the quality of the tenant). Looking at a property today, a 5 year lease signed in 1999 with 5 rights of renewal, is not a 21 year lease, it is in fact only a 1 year lease, as the tenant has the right to walk away. This would attract a higher cap rate than say a 15 year lease to a blue chip tenant.

Also these properties are valued on a per suare metre rate based on analysis of other sales, especially if vacant of it's a piss poor lease.

Points 1 & 4 of your post are mostly applicable to industrial properties and to vacant properties. These can be valued in this way but it is not sound practice. They are factors you would take account of in a valuation. Mostly they may well be valued on a per square metre rate. (oh yeah, you can also value industrial on a per cubic meter rate for certain properties, but conditions apply),

If for examle you are looking at an old industrial property with a low stud height and poor clear span spaces then it will probablly be a redevelopment prospect and you will look at the costs of demolition and rebuilding to get attractive lettable premises. You will also look at surrounding land values. Remember that in some cases existing improvemnts actually reduce the value of a property.

As for you question, are you overlooking anything else, I could wax lyrical about leases and their importance but suffice it to say that it is of prime importance in many commercial valuations.

I trust this has helped,
cheers,
RightValue

Thanks rightvalue! that was great.
I did forget about taking the lease into account! Very important indeed!
I'll now share my main reason for starting this thread.
I have a vacant block of land bought in conjunction with my first ip, it was part of the deal.
The location of these properties is in regional nsw, where i have determined there is a need for some mini-storage, therefore ive been researching the area constantly/ongoing, including many what ifs/proposed circumstances etc etc, in doing this ive found that the cost of building this development in direct relation to the income it could produce (long term cash flow) appears to be remarkably favourable.....
Approximately this investment would break even with about 30% vacancy pa and ive been basing my end figures on 75%.
So, why im asking re: valuations is i hope after development and say 6-12mths establishment timeframe that it could be revalued to say 70% lvr at xx% cap rate releasing x amount of equity to fund future investments.
Obviously as stated in your post this will hinge on previos sales data of similar properties in the area and also the timeframe the bank need to "prove" a consistent income stream to warrant the release of more debt against it..........regards add.

Hi again add,

Believe it or not, this is actually a specialist area of valuations. A guy I used to work with in NZ now specialises in this area.

Also this type of facility is very cheap to construct. The concrete is the main cost. Aside from that it is just light timber framing (providing the stud height is not too high) and covered with colourbond/steel deck roofing material on all sides. You don't even need to line all units.

Bear in mind that the labour/management component is higher than for most commercial properties as you need a manager etc. There is a fair bit of operation risk here.

If I was doing it I would get planning permission for the whole thing and bulid in stages and build the next stage as the previous stage was pretty much fully let. Or get an operator to take a lease over the whole project on a per unit basis but I would still build in stages.

Remember that your security of tenure/lease on each unit is not great. These are more of a business than a pure property investment unless you lease the whole property out vacant to an operator.

good luck,
I trust that this is food for thought,
cheers,
RightValue

hehe - i was reading the qn in a small window and I was wondering whether to reply or wait for the experts to do it....

scroll down and weve already had a definative answer from the industry....

good to see the forum continues to grow

RightValue said:

Commerial Property Valuation 101.

IF the rent is $20k pa and that is a going market rent (the rent reflects such things as in items 2 & 3 of your post, in short the level of the rent reflects the demand) and the capitalisation rate for similar properties is 6% then the value of the property will be $330k.

Adjustments will be made if a property is under rented or over rented, has other options etc (but these are covered in Commercial Property Valuation 201 & 301).

Click to expand...

Over 2 years since that was posted, but I would be very keen to hear RV's take on Commercial Property Valuation 201 and 301.

Mark

I would love to cover that but at the moment I am frantically busy flying around Australia, NZ and the USA looking at large commercial properties and then writing reports.

A couple of months ago I saw 40 commercial properties in 10 states in the US in 10 days. (ranging from $1m to $50m). I will be at 135 flights in 12 months soon.

Besides if I give all the valuers' secrets away incomes may fall

But you never know your luck.

cheers,
RightValue

RightValue said:

. . . .Looking at a property today, a 5 year lease signed in 1999 with 5 rights of renewal, is not a 21 year lease, it is in fact only a 1 year lease, as the tenant has the right to walk away. This would attract a higher cap rate than say a 15 year lease to a blue chip tenant. . . .

Click to expand...

Great info thanks RightValue.
But does this assume the 5 rights of renewal are for one year each or for 5 years each ? And do you mean the tenant can walk after the expiration of the lease or during, but with obligations to payout the remaining unpaid rent ?

BTW - I had a val on a motel last year, cost $2,400, valuer used a cap rate of 15%, a bit conservative I thought, what do you reckon ?
cheers
crest133

He means that as the current lease has one year remaining until an option is exercised then it is just that - a one year lease. If the option is exercised then it will become a 5 year lease.

Cheers,