Sometimes when you have been doing something for a long time it is easy to take what you have learned for granted, at least that’s what happens to me. Equally, it is nice to speak with people about what they do and the varying aspects of their vocation. All this ended up in a discussion with Bruce Walker about our industry. Bruce and I have worked together for 14 years. Before that, Bruce was one of Tasmania’s leading valuers, practising as a valuer in Tasmania for over 40 years. I put some questions to Bruce recently and have noted below his answers, it is excellent to be able to capture this sort of information and share it with others for their interest.
How do you assess the value of a commercial property?
The most reliable method adopted when valuing a commercial property is by capitalising the annual rental income that can be achieved from the property.
The first procedure is to inspect and measure the premises to determine a fair market rental e.g. lettable area of 150m2 @ $300/m2 = $45,000 net per annum.
Having determined a fair market rental an appropriate capitalisation rate is applied to the annual rental to arrive at a fair market value (or capital value).
It follows that in determining a net or gross annual rental, the valuer must investigate and interrogate recently signed leases of comparable properties.
The capitalisation rate is arrived at by a mathematical analysis of confirmed recent sales transactions based on the passing annual fair market rental income and the sale price.
Comparable properties must be similar in location, construction, age, use, size, condition, services available, zoning, date of sale, shape, contour, aspect etc.
Example of analysing a recent commercial sale to determine a capitalisation rate:
Property sale price – $2,000,000
Annual net market rental income – $125,000
Capitalisation rate equates to 6.25%
($125,000 ÷ $2,000,000) x 100 = 6.25%
What is the difference between a net rental and a gross rental?
Net rental is generally the sum that an owner receives because the terms of the lease stipulate that the tenant pays statutory charges which can include council rates, state government land tax and water charges.
In some instances, insurance, lift maintenance and running costs, cleaning and lighting of common areas, contribution to repairs and maintenance and security services are some costs the tenant is responsible for which may be included in a lease.
If a tenant does not contribute to the statutory charges and the charges mentioned above, this is termed a gross rental.
What are some considerations a valuer might look at when valuing a residential property?
When valuing residential properties the method adopted is referred to as a summation method. Firstly, the dwelling must be inspected and measured to determine separate areas for the different components of the dwelling which include, the living area, porches, verandahs, garages, and outbuildings. The extent of fencing, paving, driveway and landscaping are also important factors in determining a final valuation. The reason is that a much higher rate per square metre is applied to the living component of the dwelling than to a porch or verandah. If a residential dwelling is to be purchased for investment purposes, the capitalisation method of valuation is accepted methodology.
Once again, interrogating relevant comparable sales information is critical. Compare like with like. Sales that must be ignored include sales between related parties, such as, company to employee, divorce settlements, parents to siblings, mortgagee sales, adjoining owner acquisitions etc. The definition of market value is a transaction between a willing vendor and a willing purchaser, neither of whom are over-anxious and the property does not hold a special value to either party.
Rental and sale information must be recent and comparable, for example, do not compare retail sales with industrial sales, brick dwellings with weatherboard dwellings or sales in Newstead to sales in Ravenswood. Be consistent with comparing sales with net rentals, not gross rentals.
Please note this is not financial advice and should not be construed or relied upon as financial advice. The comment provided above is general in nature and reflects personal opinion only.
A Sit Down with Bruce Walker: How to Determine Property Value
