How to value commercial property in the UK

If you’re looking to buy or sell commercial property in the UK, getting an accurate property valuation is crucial. But how exactly do you go about it?

In this guide, we’ll take a look at a few of the different valuation methods you can use, including using a professional to complete an appraisal report.

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Commercial property valuation - key factors to consider

Before you start doing any sums in relation to valuation, there are two main factors to consider. These are¹:

1. The location of the property. For example, is it near other commercial facilities and/or transport links? Are commercial property values and land prices high in the area? Properties in this kind of ‘prime location’ can be more attractive to tenants, as it could mean high footfall, lots of customers and close proximity to suppliers, services and employees.

2. It’s potential for income. Larger properties with more space for tenants are considered to have more potential for income.

It is these factors that will affect the value of the property more than anything else. Although of course there are many other smaller considerations to take on board when valuing a commercial unit.

How to value a commercial property - methods and approaches

There’s no one-size-fits-all approach when it comes to commercial property valuation. You’ll need to choose the right method for each specific type of property, or perhaps even a combination of methods.

Let’s run through the main property valuation methods you need to know about²:

Cost approach

This is a very simple, rough and ready way of estimating a property’s value. You’ll simply need to add together the land and construction costs to get an approximate valuation.

Income capitalisation approach

You can also value a property by looking at its potential income.

Crucially, you’ll want to be looking at the capitalisation or ‘cap’ rate. This is the net annual rental income divided by your estimate of the current value of the property - which you can get from looking at sales of similar properties in the area.

Once you have the cap rate, or the rate of return, you can divide your net operating by this figure to get a value.

Sales comparison approach

How much are other similar properties going for in the local area? If you can match your property to one with a similar square footage and facilities nearby, you can see how much your property could expect to sell for. It’s not very accurate, but it is a quick way to come up with a valuation figure.

Gross rent multiplier approach

You can use this approach to find how long it would take to pay off the purchase of a property, using the rental income from tenants. The sum to do is this - divide the estimated property value (or the total you’ve borrowed to pay for the property) by the gross annual rental income.

Value per door

Looking at a property with lots of units or apartments? If you can find the value of one unit, you can potentially multiply it by the total number of units in the building to get an overall value. You can also do this calculation the other way round, to find the value per unit by dividing the whole building value by the number of units.

Should I use a professional valuation service?

Valuing property can be complicated, and it’s difficult to get an accurate figure. This is particularly the case for quirky properties, where there aren’t any similar properties to compare it to. It’s also really important to get an accurate valuation

This is why property owners make use of professional appraisal services. If you’re planning to make a significant investment in a property purchase, or want to get a fair price when selling a property, it’s crucial to get an accurate valuation.

If you’re considering using a valuation service, remember that there will be fees to pay. These can vary considerably, but you can expect to pay anywhere up to £5,000².

What does a property appraiser do?

A professional appraiser will look at all aspects of the building in detail, while also taking into account the location and proximity to other commercial properties. Crucially, they’ll also make an assessment of the building’s income potential. This will be partly based on location, but also on the number of tenants it could comfortably accommodate.

Using the information gathered and their professional expertise, an appraiser will produce a report. This will contain the findings of the assessment and of course, the valuation figure.

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Property valuation can be complicated, so you can’t expect to master it overnight. You’ll need to gather lots of information, do your sums and perhaps consult an expert to get an accurate figure.

But hopefully after reading this guide, you’ll have a good starting point. We’ve covered the main valuation methods you need to know about, along with some things to bear in mind about using a professional valuation service. Good luck!

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Sources used for this article:

1. Phoenix and Partners blog post
2. Realla blog post

Sources checked on 20-May-2021.