Why We Value Commercial Property?
Why We Value Commercial Property?
Within the UAE we assume that property valuations are typically used for financial institutions, where an estimated amount of debt is placed against the property for a mortgage in order to calculate a loan to value ratio. Although this is one of the most common purposes of valuation, there are multiple other reasons, whether looking to audit, invest, occupy or dispose it is important to understand the valuation process to determine that the correct market value/market rent for an asset is reported, paid or received.
Acquisition / Disposal
Investors within the market look to make future returns whether this is through capital gains or a rental return, it is important to have a strategy of market entry and exit to analyse potential market trends and forecasting cash flows. Typically for end-users/owner-occupiers, the main reason for purchasing property is to avoid rent and to pay off the property’s mortgage. By undertaking a valuation, an informed decision can be made for both scenarios which can ultimately determine a successful or unsuccessful investment.
Auditing & Accounting
Property valuations for auditing purposes are usually undertaken on a year-end basis and are required to provide advice on the appropriate values to include within financial statements. An individual or firm would request for the basis of value to be undertaken to “Fair Value” which is compliant with International Financial Reporting Standards (IFRS). Another common basis of value includes, Market Value and Market Rent which are internationally recognised and have a long-established definition, this can be found within the RICS Valuation – Global Standards. (Redbook Global Standards – 31 January 2020)
Feasibilities / Development Appraisals
A feasibility study is a process for determining the viability of a proposed initiative or development. The study will analyse a series of calculations to establish value, profitability, and suitability of the proposed development based on a client’s required inputs. These variables/inputs can be changed accordingly e.g. different rents, uses, yields or financial contributions.
Understanding How to Value Your Commercial Property?
There is a common misconception that property is simply valued by adding the land value and build cost together to determine the market value. Although this cost approach is one way of valuing commercial property there is much more depth in using this method which only just scratches the overall valuation surface. There are 5 recognized valuation methods that are set out within the RICS Valuation – Global Standards. (Redbook Global Standards – 31 January 2020) which are highlighted below.
Different Valuation Approaches/Methods?
1. Comparable Method
The Direct Comparison Approach method provides the market value of a property by “comparing” it to values obtained in the open market of similar properties. This approach looks at AED rates per sq.ft of the lettable and built-up areas. This could be considered as the key method, as each of the remaining approaches require some form of comparable analysis to function. The direct comparable approach is more effective on properties with fewer elements, for example, single/individual office units.
2. Income Approach
Income capitalisation is a valuation method estimating the value of an income-producing asset. This method of valuation relates value to the market rent that a property can be expected to produce. The net market income is capitalised at a market-driven capitalisation rate which considers all the property’s aspects. This method would be used to value properties such as full buildings of all asset classes, industrial complexes.
3. Discounted Replacement Cost (Construction + Land)
The ‘DRC” method takes into consideration the current cost of replacing an asset with its modern equivalent, fewer deductions for physical deterioration and all relevant forms of obsolescence and optimisation. This is not a market-based valuation approach and is considered relevant to specialised properties. (i.e properties that are rarely, if ever sold on the open market due to their uniqueness, which arises from their specialised nature, design, configuration, size, location or otherwise).
4. Residual Method
A residual valuation is a form of a development appraisal and is commonly used for land sites, where a development is proposed based on plots approvals and permissions. The approach takes into account the gross development value derived on a direct comparison or income method and then minus costs such as-
- Construction, Infrastructure & Landscaping Costs
- Professional Fees
- Cost of Finance
- Contingency Costs
- Marketing and Legal (Sale/Letting)
- Developer’s Profit
- Other Costs (Planning/Purchasers costs)
After all these costs have been subtracted from the Gross Development Value the net result is the residual value of the plot.
5. Profits Method
The profits method is used for valuing specialist trading properties, where the value of the property depends on the profitability of the business. The method is used for valuing properties such as hotels, petrol stations, etc.
Simple Methodology for Profits Method
- Annual Turnover minus cost and purchases = Gross Profit
- Gross Profit minus working expenses = Net Profit (FMT – Fair Maintainable Trade)
- Net Profit minus tenant’s remuneration = Adjusted Net Profit (EBITDA Earnings before Interest, Taxation, Depreciation, and Amortisation
- Adjusted Net Profit is then capitalised at an appropriate yield to give Market Value
Using The Five Methods
Ideally, a minimum of two methods should be used when valuing a property, one as the primary method and the second as a cross-reference, it is important to ensure that the method is appropriate for the purpose of valuation. All methods will take into account the properties characteristics/features such as location, specification, condition, size of the property, types of lease contracts in place, etc. Applied rates will be adjusted accordingly based on these elements.
CRC Valuations use all the above methods to a more in-depth basis,the team possesses the experience and knowledge to value all property types. Our valuers have the necessary skills and qualifications to undertake valuations to the mentioned international industry standards.
CRC Valuations provides all the mentioned valuation services throughout the UAE that are all in accordance with RICS, IVS and RERA practices and guidelines for the following:
- Secured lending
- Auditing and Accounting
- Acquisition and Disposal
- Feasibilities/Highest best use
- Internal decision-making purposes.
Our brokerage and property management departments have been active within the market for over 30 years. Fundamental information provided by our established services lines feeds through to ensure our valuations are market-facing. 30 years of presence has allowed us to build an extensive database of property transactions.
If you would like more information on valuation and our services, please visit CRC Valuations.