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How do you value a commercial property portfolio?

Written by: Anthony Spencer on Friday 19/02/2016

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As of 1st June 2016, all business and commercial valuations will be serviced under the trading name of Eddisons Taylors.

A commercial property portfolio has many advantages for the investor. These include the reassurance of a physical asset or assets, a comparatively stable income return, the potential for capital growth, the benefits of diversification, protection against inflation and a moderate risk/return profile. But how does an investor go about understanding the value of his or her commercial property portfolio? We find out.

Background

The property market in the UK is estimated to be worth almost £5,500 billion. Commercial property represents approximately 12.5%, around £683 billion, of which 60% is classed as ‘investable’.

Three main sectors dominate the commercial property market: Offices, retail and industrial, which account for £157 billion, £150 billion and £43 respectively. Other investment opportunities, which include hotels, leisure and student accommodation, has seen rapid market growth over recent years and is now valued at approximately £35 billion.

Whereas in the past, the Crown, the Church, wealth individuals and central and local governments have been the main investors in property, in recent years a shift towards private equity funds, institutional investors, sovereign wealth funds and international investors has been apparent.

Valuing your investment

Because commercial investments do not trade with openly quoted prices, unlike residential properties, valuers must estimate the value using their commercial acumen, market data, local knowledge, and other financial information about the property in question. They achieve this by using standard valuation practices derived from trusted sources such as the Royal Institute of Chartered Surveyors’ (RICS) Red Book.

The reasons that an investor may choose to have their property valued include:

  • Financing: valuing your assets allows you to borrow money or raise capital
  • Performance comparison: to achieve analysis and reporting for shareholder information, performance is compared or benchmarked by using income and capital returns
  • Transactions: depending on the type of asset being valued and the reason behind the valuation, investors may choose to disregard the Red Book. They may opt to use a new present value (NPV) or an internal rate of return (IRR) depending on their individual circumstances.

The most commonly used methods for valuation purposes are:

Investment– most typically used for retail, office or industrial properties, a Discounted Cash Flow (DCF) analysis is made of the property, using either an NPV or a IRR method.

Comparison – here the value of a property is based on a comparison of other properties in the area, taking into account factors such as the age, size and condition of the building, together with any outstanding features it may have. This enables the valuer to make an evidence-based decision which also takes into account their judgement and expertise. The comparison method is most often used for residential properties.

Residual – the favoured approach when dealing with appraising development opportunities, this method estimates the total value of the completed project and subtracts all costs needed to complete it. It can be adjusted to take into account the required profit.

Commercial property valuation can be said to be a mixture of art and science – the fixed elements can be of use but the determining factor in any valuation is the expertise and local knowledge of the person doing the valuation. That’s why, if you’re considering having your commercial property valued, it’s vital to talk to a team of experts who can offer a clear, concise and comprehensive approach. Eddisons have extensive experience in the commercial property valuation field and can be relied on to give reliable and specialist advice to investors and owners alike.

Commercial property valuation can be said to be a mixture of art and science – the fixed elements can be of use but the determining factor in any valuation is the expertise and local knowledge of the person doing the valuation

Written by: Anthony Spencer on Friday 19/02/2016

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