Commercial Real Estate Valuation
Commercial valuation depends on the income the property generates. Whether it is a complex, shopping centre, investment building, or development project, the value is an essential factor for the purchase, sale, borrow, or lease of the property. The valuer calculates the value based on criteria, such as rental or income forecasts, facilities, location, etc.
A property’s value is defined as the current worth of potential future financial benefits measured by the projected sum of all net income streams that may arise from owning the property, assets need an extended or longer period of years. Thus this long-term analysis must need a deep analysis of all the political, social, and economic factors of the current scenario which affect the future.
Commercial Valuation usually is for
Residential: Rented flats and whole buildings
Retail: Shops, shopping centres, Market, banks and building societies, petrol stations, offices, cafes, restaurants, etc.
Industrial: Mills, foundries, refineries, distribution warehouses, vehicle workshops, metal works, abattoirs, factories, plants
Methodologies
Income capitalization approach
This approach is based on the income amount an investor can expect to get from a property which can be derived from the comparison of other similar local properties, property that has income-generating potentials like retail centres, multifamily housing, office buildings, and other properties in which future benefits are expected Investors are essentially buying the cash flow stability of an asset.
Other methods
Cap Rate
A property's net annual rental income, divided by the property's current value(represents the expected return rate for a given property).
Gross Income Multiplier
This is a relative valuation approach assuming that the properties in the same area will be valued proportionally to the gross income they generate.
Gross income is the total income before the deduction of any operating expenses. Vacancy rates must be figured and the gross income multiplier must be decided and multiply it by the gross annual income. This income multiplier can be figured from the historical data. By dividing the sales prices of comparable properties by the generated gross annual income the average multiplier for the region will be yielded.
Mostly used for comparable transactions or multiples to value a stock.
Gross Rent Multiplier
If you take the sales price of a property and divide it by its annual gross potential rent, you come up with the gross rent multiplier. The Cap rate is similar to GRM in that it represents a multiple to earnings, but a notable difference between the two is that the cap rate takes expenses into account, while GRM looks at the total inflow of rental income.
Discounted Cash Flow Approach
DCF is the only method considering present money value and capturing future performance. We consider this as accurate revenue prediction, expenses, and future property value. This is a long-term beneficial method.