Commercial Property Valuation Explained: Factors Influencing Market Value
Accurate property valuations play a key role in the sale, insurance, and financing of Cape Town commercial buildings. Whether dealing with insurance claims or property sale negotiations, it is essential to have an accurate picture of what the building is worth before a transaction commences.
Valuation is a complex process that takes multiple factors into consideration to arrive at an estimate of the building’s worth. In this article, we break down the methodology used to value commercial buildings and explain each of the factors involved step by step.
The Three Types of Valuations
Estimating the value of a property can be complicated, partly because there is more than one type of valuation. In general, the property industry recognises three types of values, which may have fluctuating monetary amounts.
- Insurance valuation is generally carried out by an insurance assessor to establish the replacement value of the building in the event of major damage or fire.
- Municipal valuation is typically conducted by the local municipality and assigns a value to the property for the purpose of calculating rates and taxes.
- Market valuation is usually the amount that an experienced property agent will present to a seller before proceeding with the property sale. Market value is generally based on the most recent transactions in a given area for similar properties. It may be subject to negotiation during the sale.
An interesting aspect of property valuations is that the three types of estimates listed above can differ significantly depending on the methodology used to determine them.
Insurance replacement value tends to be lower than municipal and market valuations since insurers focus on the cost of rebuilding the property rather than acquiring it on the open market.
However, many building owners have been surprised to find that the municipal valuation of their properties is the same as or even higher than the market valuation. Some owners speculate that this may be a deliberate strategy on the part of certain municipalities to increase rates and taxes.
Having discussed the three types of property valuations that you might encounter, let us move on to the next important question: how do property professionals compile these estimates?
Methodology: What goes into a commercial property valuation
When determining the value of a property, professionals typically take several factors into account.
Property size and construction
The size of the property in square metres, along with the materials used to build it, can greatly influence the building’s value.
Property buyers and tenants are likely to be familiar with the pricing structure of commercial buildings, which is often quoted in Rands per square metre. This highlights the importance of property size since a larger property will generally cost more, all other factors being equal.
However, in practice, factors are seldom equal. One of the most significant factors influencing the value of a property is its address.
Location
The old real estate mantra of “location, location, location” is as relevant today as ever when it comes to valuations.
In practice, a 200 m² Cape Town office unit may be valued at R1,600,000 or as high as R6 million or more depending on its location. This range of prices is one of the reasons why we are able to offer a range of commercial space at various investment levels to meet our clients’ requirements.
Building facilities and amenities
Apart from size and location, the specific features of a building that add convenience or enhance the user experience can significantly impact the price.
High-speed internet, amenities like restaurants and gyms, secured parking, and green building features that focus on sustainability can all increase the value of a property.
Average sales and rental prices in the area
The average prices fetched by similar Cape Town office units or buildings in recent transactions can have a significant impact on the estimated price of a building, especially in the context of market valuations.
In this regard, Cape Town commercial buildings are somewhat similar to residential units. However, office buildings in Cape Town have an additional factor to consider: cash flow generated from rental income.
Rental prices are crucial for commercial building owners since they determine the return on investment that can be realised from purchasing a building or office unit.
- Commercial property financing often involves shorter amortisation periods than residential bonds, so the cost of having an empty office unit can be substantial.
- For this reason, areas with consistently rising rentals tend to boost the average valuation of buildings, particularly when other factors, such as spacious office units and modern amenities, also come into play.
The Importance of Accurate Valuations for Buyers and Sellers
Given the substantial amount of capital involved in every commercial property transaction, it is essential for both buyers and sellers to understand the building’s value before entering negotiations.
A seasoned Cape Town Commercial Space broker or other real estate agent will always insist on a recent valuation so that both parties have a reliable reference point when making offers and counteroffers. Obtaining market, insurance, and municipal valuations can also be helpful for potential owners to estimate insurance premiums, rates, and taxes.
Market valuations can fluctuate depending on economic conditions and the balance between supply and demand. For this reason, it is vital to obtain a recent and accurate valuation before proceeding with a property sale.
Let us Guide You in Your Next Cape Town Commercial Property Investment
Valuations, along with inspections, negotiations, and potential ownership challenges, can make commercial property transactions complex.
Our team of area specialists has extensive experience, which we are ready to use to ensure that every property transaction we facilitate results in a win-win outcome for both the buyer and the seller.
To learn more about our portfolio of premium properties in the Peninsula, contact us today.
