This may not sound like the most exciting topic to start the new year with, but understanding commercial valuations, and how to influence them, really is the key to making money from commercial real estate, especially in the volatile market we are now in.

It’s important to understand the difference between how residential and commercial properties are valued. Residential property is valued on a bricks and mortar basis - and most often the way to add value is by doing some physical works or development to the building itself.  

However, with commercial investments, there are so many more ways to add value because you value on an investment basis. An investment valuation is where a yield (or ‘multiplier’) is applied to the annual rental achievable on the property. As a result, there tends to be a value difference between vacant and tenanted properties. Value may still be added by doing physical works, but significant uplifts may also be achieved by doing “paper exercises” on the property - for example, by making changes to the lease or the tenant. Simplistically, the calculation is:
        Capital Value = Annual Rent
                    Yield

In order to add value to commercial property, you will need to influence one, or ideally, both parts of the above equation - the annual rent and the yield. The rent is crucially important, as the higher the rent, the higher the capital value.

The gross yield or ‘all risks yield’ is a valuer’s view of all the risks associated with a property (valuation is an art, not a science!). It boils down to the supply and (tenant) demand for that property. There is a reason why the term ‘location, location, location’ was derived from the commercial property market - because the location of the property can have such a fundamental effect on its value, affecting everything from the quality of the tenant to the lease terms, and from the lease length to the rent.