All Topics / Commercial Property / Commercial property valuation: tenanted vs vacant

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  • Profile photo of fxdaemonfxdaemon
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    @fxdaemon
    Join Date: 2013
    Post Count: 114

    Hi experts,

    New to commercial property and have some questions around valuation.

    1. Is there any hard and fast rule re commercial property valuation when it comes to comparing tenanted property vs vacant one?
    What is the industry best practice to value the same property with vs without tenant?
    Is it reasonable to expect 10%, 15%, 20% difference between the two?
    2. Similarly, is there industry best practice to value same property with 5 years lease to run vs 3 or 2? Is it a scaling method?
    3. Are there yet again different best practice or guideline for different types of properties, ie office vs retail vs industrial/warehouse.

    Thanks
    FXD

    Profile photo of wadezwadez
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    @wadez
    Join Date: 2013
    Post Count: 18

    Simple answer is to just buy into Steve new brisbane commerical property fund

    Profile photo of fxdaemonfxdaemon
    Participant
    @fxdaemon
    Join Date: 2013
    Post Count: 114

    Not exactly what I was after but hey since you have raise that suggestion how does Steve’s fund compare with Sentinel Group ones?
    Any performance comparison or fund benchmark as a guide?

    Thanks
    FXD

    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    To answer your question – it depends.

    Valuers will base it on the local market – so in hard to let areas there can be a significant valuation variance between tenanted and vacant, or short term vs long lease.

    Property type ie industrial, office is definitely considered and the leasing rate. For the most part commercial will often be compared on a price per sqm for lettable space – for both capital value and rental return. Depending on the property subtype and local market the prices will vary significantly.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of gshaheengshaheen
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    @gshaheen
    Join Date: 2016
    Post Count: 5

    Hi experts,
    New to commercial property and have some questions around valuation.
    1. Is there any hard and fast rule re commercial property valuation when it comes to comparing tenanted property vs vacant one? What is the industry best practice to value the same property with vs without tenant? Is it reasonable to expect 10%, 15%, 20% difference between the two?2. Similarly, is there industry best practice to value same property with 5 years lease to run vs 3 or 2? Is it a scaling method?3. Are there yet again different best practice or guideline for different types of properties, ie office vs retail vs industrial/warehouse.
    ThanksFXD

    Hi FXD

    1. There is absolutely no hard and fast rule. I assume that when you refer to a commercial property valuation, you are referring to a bank valuation for mortgage purposes (As opposed to a Real Estate Agent valuation). Valuers use primarily two methods to determine the value of a property. Direct Comparison approach where they look at similar properties that have sold in the area. Second option is the Capitalisation approach where they determine fair market rental and then work backwards (based on the yield of the property / location) to determine the value – i.e. expected rental is $50,000. Average yield for that particular property is 6%. Therefore property value ~ $830k. If you find a property that is already tenanted, you will almost definitely get a higher valuation because this eliminates one variable from the valuer’s equation. It also means that the valuer does not need to build in an allowance involved with finding a tenant (i.e. potential incentive periods, marketing periods, etc). The difference between a tenanted vs untenanted property could result in a difference in property value between 5% and 20%

    2. Not qualified to comment on industry best practice when it comparing a 3y vs 5y lease term. Based on my experiences the difference between a 3y lease and 5y lease would be negligible when it comes to the value of the asset. From what I have seen, the remaining lease term only really impacts the value is then the lease is close to expiring (less than 2y) with no further options remaining in the original lease.

    3. Offices vs Retail vs Warehouses vs Industrial. It is important to make a distinction between warehouse / factory properties and industrial properties. Industrial properties are zoned industrial and are unlikely to ever have an alternate purpose. On the flip side, warehouse properties that are zoned commercial (rather than industrial) could potentially have alternate uses. For this reason, you will find that Industrial properties tend to provide an investor with a higher yield. Offices generate mid-range yields but generally have their yields eroded by high body corporate fees. Retail yields are hugely dependent on who the tenant is and whether the property represents a “blue chip location”. i.e. a property in Lygon Street Carlton with prime frontage may only generate a return of 3%, whilst that same property out in the suburbs (say Croydon) may give a return of 7%. Warehouses / factories tend to be in the mid range also. Location plays a significant role in determining the values and yields of all asset classes.

    Hope this helps.

    George S

    • This reply was modified 7 years, 10 months ago by Profile photo of gshaheen gshaheen.
    Profile photo of fxdaemonfxdaemon
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    @fxdaemon
    Join Date: 2013
    Post Count: 114

    Thank you very much George for the detailed explanation, really appreciate it.

    Cheers,
    FXD

    Profile photo of Scott No MatesScott No Mates
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    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    @gshaheen @fxdaemon – direct comparison is not used for commercial property (primarily used in residential). I would used IRR & NPV as my primary valuation methodology and the summation method for my secondary review.

    Being tenanted doesn’t guarantee a higher valuation but provides the valuer a basis for deeper questioning – they then need to determine the sustainability of that rent, ie is it above market or too low? Is the lease favourable to the lessee (if currently owner occupied)

    There are distinctions between commercial and industrial premises dictated in part by zoning. Warehouses and factories may have an office component but the zoning will determine which is prevalent.

    Real estate agents cannot provide valuations unless they are registered valuers, they provide appraisals.

    Other commercial properties include retail and special premises eg. Telco facilities, marinas, purpose built facilities etc.

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