Knowing how to assess the value of commercial properties will help you avoid losses and make more money.
One of the most important things to know when investing in commercial properties is determining how it is valued in order to avoid losses and over-paying. Unlike residential properties, the valuation of commercial properties can be complicated because they generate profit whereas a residential properties are dwellings therefore do not generate income. (On that note, if you’re looking for a residential property checkout these 5 best-selling residential projects in Kuala Lumpur.) Hence, the valuation of commercial properties sometimes require specific valuers.
For example, developers who own agricultural or residential land and wish to build commercial properties must first pay a premium to the relevant authorities to convert said land to commercial land. The price of the premium is then transferred to, surprise, surprise, the buyers of the commercial properties that are built on the converted commercial land.
So if you’re looking to diversify your investment portfolio to include commercial properties, here are the few factors you should consider during value assessment:
Location is still relatively important to determine a good commercial property investment. The location should be a crowd generating area, in other words, it should offer good visibility which means clear and unobstructed view. There must be good accessibility to the commercial property i.e roads, railway, near to an MRT station, airport etc.
Good visibility and accessibility both go hand in hand. For instance, a shop next to a main road or highway may have a good visibility, however if the a passer-by has trouble of getting access to the shop, this will discourage crowd generation in the area. That is why many of the commercial properties that are situated next to main roads or highways having good visibility is less valued because there is no crowd access to the location.
2. Blue chip tenant
Imagine that there are two commercial properties up for sale in the market, one of which is currently rented out to a bank, fetching good rental yield with an unexpired tenancy of five years while the other commercial property remains vacant and not rented out.
If you are a property investor and you do not intend to use the premise for your business, you would not think twice to purchase the commercial property with the bank as a tenant. The reason is simple. Investors do not like commercial properties with high tenant turnover. Everytime a tenant stop renting and move out of the building, investors will likely have to bear:
a. The cost of touching up and repair of the building for the next tenant:
b. The cost of maintenance of the commercial property;
c. The loss of rental during the period the commercial property remains vacant which could be for a period of up to six months or more
A blue chip tenant is a tenant which upholds stable track records through economic ups and downs. Having a long unexpired tenancy and a blue chip tenant means that you are deemed to fetch the yield for at least five years despite of economic downturn (if any).
3. Investment performance
Projected profit can be used as a method to determine a good commercial investment. In order to use this method however, there has to be businesses already operational within it. This method is suitable for businesses such as guest houses and pubs using simple measures of investment performance cap rate, cash on cash return, and gross rent multiplier. The profit method factors in multiple profit generating characteristics that are beyond size, quality of construction and locality. However they do not take into account changes in cash flow over time, risk and the time value of money.
Contributed by Vicky How, principal of Propedia Consultancy/ Edited by Mira Soyza.