Typically there are 6 ways to calculate the value of a commercial property:
- Comparable Sales Method
- Gross Rent Multiplier
- Capitalisation Rate (Cap Rate)
- Summation Method (Cost Approach)
- Hypothetical Development Method
- Replacement Cost Method
With the most popular being Gross Rent Multiplier and Comparable Sales.
Though it is possible to calculate the value of your commercial property for yourself, there are advantages to using a property valuer. These advantages include having a report that can be used in an official capacity such as settlements as well as aid in making large financial decisions for your business.
This guide can help you understand how to value commercial property and become a little more familiar with the process of conducting a commercial real estate valuation.
What is a Commercial Valuation?
A commercial property valuation is a form of business valuation. It is the valuation of a property that is used for the purposes of operating a business and generating income.
These commercial real estate valuations offer more than just a commercial building appraisal. Depending on the method of valuation, you can estimate how much income the property can generate and/or its return rate. A good commercial valuation will inform you whether the property is worth the investment.
How Do I Calculate the Value of a Commercial Property?
There are several methods that can be used to calculate the value of your commercial property. You need to know which method is best for you. but here are two of the more simpler ways of calculating commercial property value.
Comparable Sales Method
This method revolves around the recent sales of local commercial properties that are comparable to yours. These properties must closely resemble your property, as they must be a similar type of property, located in the same area and most importantly for this method, must be of similar size.
To find comparable properties you can look online on commercial property listing sites or contact your local real estate agent.
Once you find suitable comparable properties, you must calculate the average price per square meter the properties have sold for. Once you have this figure you multiply it by the size of your property. Simply put the formula for the comparable sales method is:
Value = Average price per square meter x property size
For this method, it is best to use at least 3 comparable properties that have been sold in the last 6 months. The more comparable properties you use, the better.
Gross Rent Multiplier Method
The Gross Rent Multiplier Method of calculating commercial property value is fairly simple so long as you have the necessary figures. This method is a capitalisation method, much like the income capitalisation method. For a commercial lease valuation, this could likely be one of the methods used by a valuer.
For this method, before you can calculate the value of the commercial property, you must first calculate a Gross Rent Multiplier (GRM). To do this, like for the method above you will need the sales or listing price of local comparable properties and their annual gross rental income.
You then divide the price by the annual gross rents, which means the formula will look like this:
GRM = Sales Price ÷ Annual Gross Rental Income
This process is repeated for all comparable properties that you have found and then you use the average GRM to calculate your commercial property value.
Again, you should use at least 3 comparable properties and they must be currently listed or have been recently sold.
Once you have the GRM, you can multiply it by your current annual gross rent income to determine your property value. The equation for the GRM method looks like this:
Value = Gross Rent Multiplier x Annual Gross Rental Income
Both methods we have mentioned can be combined with other methods. It is a common practice for commercial valuers to use multiple calculation methods in order to provide their clients with an accurate and true property value.
These two methods can be used for a rental valuation. Other methods a valuer may use include income capitalisation, development potential and replacement cost. Each method can be used alone for a specific purpose or used in combination with another. For the best and most accurate results, it is recommended to hire a specialised commercial valuer. They can determine the best methods to use for your property so that the report truly reflects the value of your property.
For more information on how to calculate commercial property value, or to simply request an expert commercial valuer in Melbourne, enquire through our contact form or call (03) 9021 2007.