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Types Of Commercial Property Valuation Methods

Commercial property valuation is about determining the estimated value of a property for selling, purchasing, insurance, and loan approval purposes. Commercial property valuation also plays a huge role in financial reporting for real estate business owners. 

When it comes to commercial property valuation, there are a lot of methods available that can be used for it. The choice of a commercial property valuation method is made based on the property type, its structure, and the distinct features that set it apart. 

If you own commercial real estate and you want to find its market value, then this article is for you. Keep on reading to learn more about the types of commercial property valuation methods. 

Importance & Benefits of Commercial Real Estate Valuation

Independent commercial property valuation is highly recommended because of the following benefits:

  1. Accurate commercial property valuation
  2. Real estate accounting and record keeping 
  3. Commercial real estate selling and purchasing
  4. Lease amount calculations
  5. Choosing the right insurance plan
  6. Securing loans from government and private entities
  7. Informed decision making
  8. Avail investment opportunities as they come

Types of Commercial Real Estate Valuation Methods

Cost Method

This commercial property valuation method considers the cost of rebuilding a commercial real estate structure from scratch to find the value of a property. 

According to this method, you need to consider the cost of the land and the materials required to rebuild the commercial property structure. 

Once you have calculated the quote for the rebuild, the number would represent the close estimation of the market value of the real estate. 

The valuation method is recommended for unique commercial properties, and they don’t have comparable real estate options to find value estimation. 

Sales Comparison Method

The sales comparison method is also called the Market Approach, as it considers the market value of similar properties sold in the local real estate market. 

Real estate valuers use the data from the recently sold comparable properties to find a cost estimate for your commercial real estate. 

For example, if you have a 4-floor commercial building, the market value of all the 4-floor buildings in the neighborhood would be close to one another. The difference is in how the buildings are built and their specific amenities.   

Value Per Gross Rent Multiplier Method

The Value Per Gross Rent Multiplier (GRM) method calculates the market value of a property by dividing the estimated property value by its gross income. 

Here is how it works:

Let’s say a commercial property is priced at AED 2,000,000 and generates AED 80,000 in revenue. The value of GRM would be 2,000,000 / 80,000 = 25 GRM. 

Value Per Door Method

This commercial real estate valuation method is specially used for buildings having multiple apartments with more or less the same structure. 

This method considers all the apartments in the building to find the estimated value of the entire commercial property. 

For example, if a commercial property is priced at AED 2,000,000 and has 20 apartments, a single door would be AED 100,000.

Cost Per Rentable Square Foot

Cost per rentable square foot combines the tenant-occupied square footage and the common area used by all the occupants. The common area may include the lobby, stairs, lifts, parking space, etc. 

To find the value of a commercial property using this method, you can use the estimated market value of the property and compare it to the average lease cost per square foot. 

Income Capitalization Method

This valuation method includes considering the amount of money an investor can drive from a real estate investment. This projected income can be calculated by looking at the numbers from similar properties in the area. 

Properties with the highest potential for profits are more likely to be sold at a higher price. This is what makes it essential for sellers and investors to get a valuation done to determine the feasibility of the investment. 

Learn more about Importance of commercial property valuation

Discounted Cash Flow Approach

This commercial property valuation approach determines a property’s present estimated market value by considering the potential future cash flow from the property.

The discounted cash flow approach is recommended for commercial properties and residential buildings with multiple apartment units. Real estate valuers use this valuation method to determine whether a commercial property investment is worthwhile. 

Conclusion

Commercial property valuations help real estate owners learn about the market value of their property that they can use for making informed investment decisions, securing loans, deciding on lease costs, and getting real estate insurance plans. 

We recommend that you consult a real estate valuation expert to determine the right valuation approach for your property. Get in touch with Land Sterling for professional commercial property valuation services in Dubai, UAE. 

FAQs

Here are some of the ways you can value a commercial property:

  • Income Capitalisation (Cap) Rate
  • Comparable Sales
  • Summation/Cost
  • Hypothetical Development
  • Replacement Cost

The cost of commercial property valuation depends on the specifications of the valuation project.

A property’s market value is the price at which a willing buyer and seller can exchange contracts in a situation in which all relevant facts are known, and the parties to the transaction are acting voluntarily and per their own best interestse.

Some of the most common property valuation methods include comparative analysis, investment, residual, profits, and cost-based.

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Vinodh Mahadevan MRICS

Author

Vinodh Mahadevan MRICS

Vinodh Mahadevan is the Head of Business & Strategy at Land sterling and a Member of MRICS. With over 14 years of experience in investment advisory, consulting, valuation & advisory services, he has gained extensive exposure to valuation engagements. Vinodh's expertise includes due diligence exercises, appraisals of commercial and residential properties, mortgage and collateral appraisals, retail malls, large-scale industrial parks, hospitality and entertainment projects, and other special use real estate valuations.

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