fxdaemon wrote:

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 8 years, 5 months ago by  gshaheen.

Hi Richard,

Just like there are bankers who have previously set up poor loan structures, there are Brokers in the market who serve their own self-interest. Whether this means that they chase the highest brokerage / trail, or potentially only referring deals to “preferred” financiers.

Not sure about the space you operate in – In the commercial space however, brokers forward their deals to commercial bankers anyway. If the broker understands commercial deals, deal structuring may be done via consultation between the broker and the banker. If the broker does not often deal with commercial deals, structuring is largely done by the bank.

In either case, a good broker will genuinely provide a client with the best possible offering from a price / structure perspective. Likewise, a good banker will do the same thing.

It’s all about finding a person (broker or banker) who is capable.

George

Hi Richard,

I do a lot of loans for SMSFs in Victoria.

While I haven’t come across your exact circumstance before (residential property with personal use aspect), you may wish to explore the possibility of a Unit Trust owning the property.

Units in the Unit Trust could potentially be owned by your SMSF with remaining Units held in either your name personally or perhaps some other company / trust.

Please don’t take this as advice… Just an idea.

George S