Whether you’re a buyer, seller, lender or insurance provider, commercial real estate valuation is the cornerstone to make informed decisions and profitable transactions.

For beginners, thriving in a volatile real estate market such as UK, can be challenging. Thus, property valuation serves as a key metric to gauge your performance and guide strategies in the commercial real estate sector. 

Considering the changing market dynamics a misleading property valuation may cost you a high fortune. Hence understanding a commercial property valuation isn’t just about determining worth- its a strategic tool to mitigate risks and identify opportunities in uncertain economies. 

In this article we’ll take you through the fundamentals of commercial property valuation, highlighting its significance, some common valuation methods and the challenges involved. Meanwhile, you’ll get to know a little insight on how our company surveying corp covers the valuation challenges to drive the most reliable results.  

What is commercial real estate valuation? How does it work? 

Commercial real estate valuation is a process to measure market value of properties that are intended to use for business purposes. It undertakes various methods and  variable factors such as location, environmental characteristics, market trends, economic conditions, government legislation and policies. 

Considering both quantitative and qualitative data, current estimated value is then used to carry out strategic decisions by investors and occupiers. 

While these decisions are decided on the level of profitability, risk and revenue a project holds. Moreover, property owners require appraisals to overview their asset performing in current market dynamics. 

Significance of property valuation in London market: 

Since the end of the pandemic, the UK commercial property market has observed a positive trajectory in commercial property values, as per RICS survey report. This upward trend is forecasted to continue for the next 12 months as well. 
Meanwhile, an effective valuation can be a crucial tool to navigate through the changing London’s real estate market. With the current metrics, you can think ahead of times such as investing into new lands or undervalued lands that have the potential to grow. Also, accurate valuations can help you secure better loan terms for mortgaging commercial property. Further, any missteps in real estate transactions can be avoided such as overpaying and underselling of properties.

Some common methods and challenges involved in valuation: 

Valuation isn’t a simple process, it’s an art. Different methods may lead to different results. It’s hard to determine which method can actually reflect the real time value of your property, unless you are not a professional with adequate market insights.  

Below are 3 common approaches widely used by real estate appraisers: 

1.The Income Approach

One of the frequently adopted mechanisms for commercial real estate property valuation is the income approach. Under this method, the value of a project or property is determined by the revenue it generates over a specific period. If the expected costs exceeds revenue- it means you shouldn’t be investing into such a project, or simply the risks are higher than the opportunity. 

Challenges: 

This method can be suitable for stable businesses, where the income streams are predictable such as utilities. Whereas, properties with uncertain cash flow due to market variables can be difficult to analyse, one example of which are tech companies. 

The Sales Comparison Approach:

This method compares the value of recently sold properties with similar characteristics and geographical location, to one that is being under valuation. Apart from sales listings, your appraiser would draw similarities between properties based on location, price per sq foot, age, condition, proximity to market places, etc.  

Challenges: 

The complexity involves availability of fewer comparable transactions. Also, different  parameters make valuations procedures difficult to adjust for higher accuracy, particularly in case of unique commercial properties.

 The Cost Approach

This appraisal method is appropriate for unique properties where comparable market data is scarce such as schools and hospitals. In this case, the property value would be the same as it takes you to build a substitute property structure from scratch. That could not necessarily be identical but functionally equivalent. The procedure first caters independent commercial land valuations and then depreciated replacement costs are added to the land value. 

Challenges:

This method is inapplicable on lands with no vacant spaces and restrictive planning permission regulations. 

Surveying corp’s best Practices for Accurate Valuation

Considering the optimal use of reliable metrics and property potential, here are some key strategies that underpins our valuation process.

Combining Multiple Methods

A single method for valuation may have its own constraints and downsides. At Surveying Corp, we use a blend of methods. Each of which values differently. The results can be compared and used for decision making that fits best to your purpose of valuation and market conditions. 

For example, a property valuation in a transitioning market is more reliable under cost or sales comparison than income approach, due to uncertainty in future cash flows. 

Avoiding common pitfalls : 

Unlike residential valuations, finding the right parameters to judge a property with their nearest ones are often most difficult in commercial valuations. Our experts use a balanced approach to cater both physical factors and external factors. The next crucial step is to remove any bias with stress-testing and peer consultations. 

Use of AI tools and Data sciences: 

We leverage the best use of AI and data sciences to drive the most accurate valuations through automated valuation models ( AVM’s). It can sever both big data insights, along mapping down location based insights through geospatial technology. These machine based learning algorithms are able to generate valuations based on property features, location demographics, historic sales data, predict future market trends and other economics. 

IoT devices and sensors for physical inspection:  

Conducting a physical inspection on a massive commercial site was hard and challenging. Our company surveying corp makes swift moves through the process by using the smart IoT devices and sensors. Drones equipped with smart sensors not only provides high revolutionary imagery but able to capture real time data regarding property’s energy consumption, wear and tear, structural issues and much more, 

Conclusion: 

The uprising of the UK real estate sectors brings along  multiple risks and opportunities.Yet, the complexities and challenges demand assistance from business valuation specialists. By reliable commercial real estate valuation you can leverage optimum use of opportunities by effective negotiations and more profitable transactions.