Commercial Property Valuations

Valuetec has the experience to confidently undertake the valuation of numerous commercial property types which require a specialised level of expertise:

  • Shopping centres
  • Industrial & Warehousing
  • Offices & office parks
  • Farms, game lodges and agricultural holdings
  • Specialised properties – hospitals, churches, schools, casinos, hotels and guest houses
  • Petrol filling stations
  • Townships, potential Townships and development projects
  • Golf estates
  • Vacant land

Commercial properties generate income and therefore generally require the utilisation of a detailed discounted cash flow analysis or the first years income capitalisation method (capitalisation of income approach) when performing a valuation. These methods are described in more detail:

Capitalisation of Income approach: Apply gross open market rentals to the accommodation and then deduct normal landlord outgoings and a management fee to arrive at a net annual income figure. This sum is then capitalised in perpetuity at an appropriate yield.

Discounted Cash Flow Analysis: Project income for a 10 year period (assuming a 10 year cash flow is utilised depending on the expiry dates of the lease agreements in place) based on existing contractual leases, from which forecasted expenses are deducted yearly to arrive at the net annual incomes, which the sum of, are discounted to present value. To the sum of these discounted yearly net incomes, is added the residual sale value, which is the anticipated selling price of the property at the commencement of year 11, also discounted to present value.

Definitions of Important Terms:

  • Discounted Cash Flow (DCF) Analyses A financial modelling technique based on explicit assumptions regarding the prospective cash flow to a property. As an accepted methodology within the income approach to valuation, DCF analysis involves the projection of a series of periodic cash flows to an operating property. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish an indication of the present value of the income stream associated with the property. Periodic cash flow is typically estimated as gross income less vacancy and collection losses and less operating expenses/outgoings. The series of periodic net operating incomes, along with an estimate of the reversionary value, anticipated at the end of the projection period, is then discounted. 
  • Discount Rate The rate used to express an expected future cash stream in present value terms. In most instances, the discount rate is equal to the hurdle rate (capitalisation rate of a property plus the expected constant growth rate of its cash flow in perpetuity). Or: The minimum total return (income yield plus expected capital appreciation) required by potential investors to induce them to invest in a property. This is also known as the required rate. Theoretically, it should reflect the opportunity cost of capital, i.e. the rate of return the capital can earn if put to other uses having similar risk.  
  • Capitalisation Rate (“cap rate”) The divisor utilised to convert income into a value. The interest rate or yield at which the annual net income from an investment is capitalised to ascertain its capital value at a given date. The capitalisation rate is formulated to capture current market conditions and it should embody perceived long-term growth.
  • Reversionary Rate The capitalisation rate used to convert income, into an indication of the anticipated value or Residual Sale Value of the property at the end of the holding period.
  • Gross Market Rental The estimated amount for which a property, or space within a property, should lease on the date of valuation between a willing lessor and a willing lessee on appropriate terms in an arm’s-length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. “Gross” means the rental quoted represents all the monies payable, including all operating costs recovered by the landlord (if any), but excluding VAT and the tenants own electricity and water charges.
  • Highest and Best Use The highest and best use identifies the most profitable, competitive use to which a property can be put, and may be defined as: The reasonably probable and legal use of an asset, which is physically possible, appropriately supported, financially feasible and that results in the highest and best value of the asset being valued. The highest and best use identifies the most profitable, competitive use to which a property can be put. Like value, highest and best use is a market driven concept, which may be defined as the reasonably probable and legal use of vacant land, or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest land value. 

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