The purchase of any commercial premises usually hinges on the valuation of the building. Obtaining a valuation of the property ensures both buyer and seller achieve a price in line with the current market conditions that is fair for its condition and location.
However, assessing this can be more complex than it first appears. There are some differences in how a commercial property in Ireland is valued compared to other property purchases. This can leave investors uncertain when it comes to determining what the actual fair value is of a commercial investment. Unlike a residential property, where the condition of the property is all-important, when it comes to a commercial purchase there are more considerations that determine its value.
You’ll, of course, want to consider the condition of the plumbing, the roof, and heating systems. Additionally, it is always worth consulting a professional and licenced appraiser ahead of any purchase. As well as basing a valuation on the state of the property and how it is serviced, a commercial valuation will also depend on some uncontrollable elements like the current market per square metre and the cost of maintenance which can vary dramatically from industry to industry.
Unfortunately, there’s no one size fits all approach to determining the value of a commercial property. To help you understand how professionals value commercial property in Ireland, we have put together this article to cover the five main ways that commercial property in Ireland can be valued to help you better understand the process ahead of any sale or purchase.
So now, let us take a look at the five ways to value commercial property in Ireland.
1. Cost Approach
The cost valuation approach considers how much it will cost to rebuild the property from scratch. The appraisal will take into account the current value of any land that the property sits within the boundaries of plus the cost of raw materials needed for a complete rebuild of the whole structure, less depreciation.
Professional appraisers will usually adopt this approach when it is difficult to compare the price with similar properties nearby. Often this is because the commercial property has undergone significant upgrades or contains highly specialised or unique elements that make it impossible to compare it to another property.
These elements will determine the price the valuer believes the buyer should pay for the land and buildings. The logic behind this method is that a buyer shouldn’t pay more for a property than it would cost to rebuild it completely.
2. Sales Comparison Approach
This method relies on the availability of recent sales data of comparable commercial properties within the same location or defined radius. If a valuer or buyer can find the sales data for these similar properties, it will give them a good idea of the current fair market value. This method is also sometimes referred to as the market approach. The sales comparison approach is very similar to how a residential property may be valued.
For example, if a building within the same industrial estate sold for 800,000 euros and the size and state of repair was comparable to the property being valued, the appraiser may decide that the commercial land you are enquiring about holds a similar value. The downside of this method is that it can be heavily affected by both local and market conditions, and comparable sales data is usually limited to properties sold within the same twelve-month period.
3. Income Approach
This method is considered especially relevant in the market valuations of apartments, restaurants, office buildings, hotels, and shopping centres. However, the principle can be used to compare any commercial properties that bring in a regular income. The projected income could be calculated in part through comparison to other similar businesses locally and an expected decrease in maintenance costs over time.
As an example, a build that was purchased for 1 million euros is expected to yield 5% based on market research in the exact location. That 50,000 annual income could be enhanced by remedying any inefficiencies or passing on costs to any expected tenants, for example, to cover fuel costs and water rates.
4. Gross Rent Multiplier Approach
This approach is not that different from the income approach detailed above. But instead of basing the value on the income, it focuses on the rental yield. It measures and compares a commercial property’s potential valuation by taking the price of a property and dividing it by its gross income.
Calculating the Gross Rent Multiplier Approach can be done using the following method:
Property Value = Annual Gross Rents x the Gross Rent Multiplier
For example, if you purchase a commercial property for 500,000 euros and it generates 70,000 in gross rents each year, your gross rent multiplier would equal about 7.14 or 500,000 / 70,000. A professional appraiser would adopt this valuation formula to identify properties with a low price compared to their market-based potential income.
5. Value Per Door
Similar to the Gross Rent Multiplier approach, this method is relatively quick and easy to calculate, although it may not be as accurate as other approaches. This method is most effective when valuing commercial properties with multiple units, such as a shopping centre or numerous apartments. In this case, if you can find the market value of one unit, it is possible to multiply that price by the number of units or apartments within the commercial property you are purchasing. This method doesn’t take into account each unit’s size or specific features. Instead, it simply takes the number of doors and multiplies the value in order to value the entire commercial property.
Other ways commercial properties can be valued in Ireland
The above list is certainly not exhaustive, and valuing a commercial property can be tricky due to the many considerations that need to be given when appraising a particular unit. A professional valuation may combine several of the above methods to reach a price when necessary. In addition, it is also possible to value property by its usable square footage. That is, by multiplying the cost of the space each tenant will occupy and combine with the communal areas that all tenants will have access to, for example, lifts and stairways. A comparison is then drawn to the average lease cost per square foot to arrive at a final value.
Should I use a professional valuation service?
Unless you are a seasoned expert in buying and selling commercial properties in Ireland, it’s advisable to seek the help of a professional valuation service due to the many variables and non-standard considerations that may apply. Especially in areas that do not have similar developments to draw direct comparisons between.
A professional property appraiser will ensure the property is valued at a fair price. If you are buying or selling a commercial property, you will want to make sure the property has been professionally valued before agreeing to a sale. The cost of a valuation service can vary depending on location and the amount of work involved.
A professional appraiser will complete thorough research covering all aspects of the property and its location. They will also consider the income potential of the lot as well as the number of tenants the building could potentially accommodate. An appraiser will produce a report which will detail their findings and their all-important valuation figure.
Buying a commercial property in Ireland
Purchasing commercial property is an entirely different ball game from investing in residential property. If you are considering investing in your first commercial property, we recommend checking out our ultimate beginner’s guide to purchasing commercial property in Ireland, for more information on the process involved and the legal considerations of buying a commercial investment property in Ireland.
Making your first commercial property purchase doesn’t need to be intimidating. Once the property has been sourced and valued, the process becomes more similar to a residential investment property purchase.
In conclusion
Valuing a commercial property doesn’t have to be a complex task. You can either do some research to arrive at a valuation yourself using one of the five methods detailed above or for a more in-depth valuation, consider making contact with a professional appraiser to assist with the buying or even selling of a commercial property to ensure the building is valued fairly and you get the best possible deal.
Whichever method you decide to use, make sure you do your research and gather information on the local area. We hope this guide has been useful in explaining the valuation methods of commercial properties either so you can carry out the work yourself or have a deeper understanding of how a professional would value commercial premises.
