Beginner’s Guide to Valuing Commercial Property in Australia

What is commercial property?

Commercial property refers to properties that are primarily used for business purposes, including retail space, office space, and industrial properties.

Investing in commercial property can provide a great return on investment, as commercial properties often generate higher rental income than residential properties.

How to value a commercial property

There are several methods used to calculate the value of a commercial property, including:

1. Income approach

This method estimates the value of the property based on its income-generating potential. It takes into account the property’s net operating income (NOI), capitalisation rate (cap rate), and expected return on investment (ROI).

2. Sales Comparison approach

This method compares the property to recently sold similar properties in the area. The sale prices of these comparable properties are used as a benchmark to determine the market value of the subject property.

3. Cost Approach

This method estimates the value of the property based on the cost of replacing it. It takes into account the cost of the land, construction, and other improvements, less any depreciation.

4. Gross Rent Multiplier (GRM) approach

This method estimates the value of the property based on its gross rental income. It divides the sale price of the property by its gross rental income to arrive at a multiplier. This multiplier is then applied to the gross rental income of the subject property to determine its value.

Each method has its strengths and weaknesses and may be more appropriate depending on the type of commercial property being evaluated and the purpose of the valuation.

It’s important to work with an experienced and knowledgeable commercial real estate appraiser or valuer who can help determine the most appropriate method for valuing a particular property.

Factors to consider when valuing commercial property

• Net Operating Income (NOI): Net Operating Income (NOI) is the total income generated from a commercial property minus the operating expenses. Operating expenses include property management fees, property taxes, insurance, maintenance, and repairs. The NOI is an essential factor in determining the value of a commercial property.
• Comparable Sales: Comparable sales refer to the sales of similar properties in the same area, which are used to determine the fair market value of a property. When valuing commercial property, it’s important to consider the sale price of similar properties in the area to determine the property’s value.
• Cap Rate: Cap rate, or capitalisation rate, is the rate of return on a commercial property investment based on the property’s net operating income. The cap rate determines the property’s value and is calculated by dividing the NOI by the sale price. A higher cap rate indicates a higher rate of return on investment.
• Capital Growth: Capital growth is the increase in the value of a property over time. Commercial property investors should consider the potential for capital growth when valuing a property. Properties in areas with high demand and limited supply will likely experience higher capital growth.
• Lease Terms: The length of the lease and rental increases are essential factors to consider when valuing a commercial property. A long-term lease with regular rental increases can significantly increase the property’s value. On the other hand, a short-term lease with infrequent rental increases can decrease the property’s value.
• Property Management: Property management fees can significantly impact the property’s net operating income. It’s essential to consider the cost of property management when valuing commercial property, as it can affect the property’s profitability.

Conclusion

Valuing commercial property in Australia requires a thorough understanding of the various factors that impact the property’s value. These factors include net operating income, capitalisation rate, comparable sales, lease terms, location, size, condition, and property management fees.

Due to the complexities, Smart Property Investment does suggest investors employ the services of a professional to assist them with their property valuations.

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