Commercial Property Valuation
Commercial properties such as shops, offices, workshops, factories etc are usually valued using the income capitalisation method of valuing. This method is seldom used to value residential properties. See Residential Property Valuation for details on the valuation of residential property.
The income capitalisation method of valuing treats the property to be valued, known in valuer jargon as the "subject property", as an investment property where the main motivation for ownership is the income that the property generates. This is typically the approach an investor would use.
The income capitalisation method of valuing is based on the capitalisation of the nett income generated by the property and is achieved by the algebraic manipulation of the formula Value = Nett Income / Capitalization Rate . The capitalisation rate, known in valuer jargon as "cap rate", is determined by analysing sales of similar commercial property in the same area.
An example of how the capitalisation process works is as follows:
If a factory building generates a nett annual income of R300 000 and similar properties in the area have sold based on a cap rate of 12%, the subject property would be worth approximately R 2 500 000, as R300 000 divided by 12% = R 2 500 000
If you anticipate purchasing a commercial property the seller should be able to provide you with a valid lease and a detailed income and expenditure (income statement) for the subject property. If this information is not available the valuation can still be completed using information available in the market.
If the seller is not able to provide this information, well, that tells its own story about the management of the investment property!