Are you considering investing in commercial property or buying premises? Understanding how commercial property is valued and how to increase its long term value can make all the difference in ensuring a successful investment.
With the right knowledge and approach, you can maximise the potential of your property and secure a solid return on investment, regardless of market conditions.
In this article, we’ll explore practical strategies for increasing commercial property's value, from enhancing the physical space to optimising the potential income. Whether you’re a first-time investor or an experienced business owner, our expert tips and advice will help you make informed decisions and achieve your goals.
How do you calculate the value of a commercial property?
There are four valuation methods to calculate the value of a commercial property:
- Sales comparison approach – look at how much equivalent size commercial buildings are selling for in the area. Thanks to the internet, it’s possible to glean a wealth of information on the value of comparative properties, providing a solid estimate of your property’s worth.
- Cost approach – calculating the replacement cost of land improvements, including buildings, landscaping and car parking. This method needs to be more accurate to be used in isolation and should be accompanied by calculations from the direct comparison approach, gross rent multiplier, and cap approach.
- Gross rent multiplier – uses the formula: Value = Gross Rental Income x Gross Rent Multiplier. For example, a property that generates £80,000 in gross rental income each year, multiplied by a holding period of 10 years, would place the property's value at £0.8 million. Make sure you build a five per cent buffer for how long a property could be vacant between tenancies.
- Cap rate method – this method is calculated by taking the net operating income and dividing it by the price of the property. Net operating income (NOI) is total income minus vacancies and expenses.
How do you rate the rentable value of commercial property?
To calculate the rentable value of a commercial property, you must determine the square footing of the property. You’ll then need to refer to the commercial lease to ascertain the square footing rate, for example, £8 per square foot.
To calculate the quarterly rent for the commercial property, multiply the square footing of the property by the square footage rate. This will give you the annual base lease value (for example, 20,000 square feet times £8 per square foot = £160,000). Then divide by four to get the quarterly rent owed (£40,000).
You will then need to look at rental values for comparable properties in your area to ensure the rent you plan to charge aligns with the current market.
How can I increase the value of a commercial property?
Below are our top five tips that will help increase the value of commercial real estate:
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Understand the market – with employers increasingly offering hybrid working to attract talent, you may find investing in a modern suburban office with excellent transport links is a sounder investment compared to a multi-office central city building. In addition, thanks to the continual rise of people purchasing online, demand for warehouse space continues to soar.
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Location, location, location – when it comes to commercial property, the right location will depend on the type of property you plan to buy.
For example, if you invest in an office block, easy links to public transport and plenty of surrounding food and coffee shops will help retain the property’s value. However, if you plan to purchase a warehouse to store goods for online distribution, the ideal location is close to major road networks and/or ports.
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Have your perfect tenant in mind when fitting out your commercial property – if you want smart, young tech startups to fill your premises, make sure you make provisions for features such as breakout rooms, a small in-house café or communal areas. Looking to attract professionals such as lawyers and accountants? Ensure your property has meeting rooms and large communal spaces for networking.
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Tenants increasingly want green properties – furthermore, the Government has recently tightened the requirements concerning EPC ratings, requiring landlords to ensure their property has a minimum E rating before a property can be let to new or existing tenants. Landlords can also invest in a BREEAM (Building Research Establishment Environmental Assessment Methodology) certificate. This shows tenants that you are dedicated to making a building more sustainable and environmentally friendly.
- Consider curb appeal – although it may sound obvious, ensuring that your commercial property is attractive to potential tenants and buyers is important. Simple things like putting up secure fencing around a manufacturing plant or creating a small garden if there’s any green space around the premises can substantially affect how much commercial property tenants and prospective buyers will pay to let or purchase the property.
Get legal assistance from LawBite
LawBite has years of experience helping startups and small businesses achieve their commercial ambitions. If you need advice concerning commercial property valuation, you can book a free 15 minute call with one of our expert commercial property lawyers, who can help you navigate the law and your available options, or call us on 020 3808 8314.
Additional resources
- Faster and more transparent commercial property advice
- Understanding commercial property insurance
- What is a commercial property rent review?
- The difference between a lease and a licence
- Understanding the Estate Agents Act 1979
- The Consumers, Estate Agents and Redress Act 2007
- How to become a property developer
