Commercial Property in Real Estate Investment - Coursework Example

Value can be characterized as the factor that equates the forces of demand and supply for property. Demand of a certain property will greatly depend on factors such as size, age and wealth of the population. Market value can be described in simplest term as the value that result from the overall forces of demand and supply. RICS (2012), defines market value as “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.” This definition is recognised internationally, it is hence the figure that should appear on a sale contract at the time the valuation was incepted. When determining market value charges like debenture or existing mortgage of that particular property are ignored. An ideal market value in respect to property right can be termed as one that is offered in an open market in presence of a willing buyer and willing seller. Open market value is no longer used it has been substituted with definition of ‘market value.’ Various challenges that face the valuer in arriving at a rent of a commercial property A valuer has to carefully estimate the worth of a commercial property’s rent based on his judgement and experience. The appraisal of commercial property’s rent has to consider different factors that will form the basis of valuation. An accurate opinion regarding commercial property’s rent is one that takes into account factors that contribute or affect the determinations of property’s value. Determination of commercial property’s rent is challenging due to factors such as physical, economic and practical factors. Though these factors can be determined objectively, a certain degree of subjectivity exists making the valuation process difficult (Yomralioglu 1993). Market characteristics have made valuations very challenging, but it can be minimized by improving dissemination and accessibility of data (Wyatt 1995). Market value is responsible in determinations of valuations like commercial property’s rent, which require sufficient records of transactions but the valuers don’t have enough information that can be used for comparative reasons due to commercial secrecy. Physical factors that are capable of challenging valuation of commercial rent can comprise of; availability of social amenities such as schools, hospitals, shopping malls and churches; quality of convenience such as proximity to public transportation or accessibility of road; similarity of land use and other type of physical peril such as terrain and other natural phenomenon that there occurrence can affect the commercial property. Physical factors can be said to be challenging since there variation is not heterogeneous, example, an area with almost the same population and same element of business element will draw different rent per square meter due to issue of difference in character of soil. The type of soil can influence construction costs, which are directly proportion to the value of the commercial rent. As illustrated a slight difference in a physical property can adversely affect the rent of the commercial rent. The other factor that makes it very difficult for valuers to appraise rent of commercial properties is economic factors. These factors of economic forces can include, tax, inflation, industrial and commercial trends, natural resources, fiscal policies, monetary policies zoning laws and other more factors. Inflation is very challenging to appraisers when determining the rent of a commercial property, because it leads to instability of prices. Inflation has coerced appraisers to quote a higher market value of commercial rent as a futuristic precaution measure without performing an economic analysis. In economics, demand and supply is not fixed, from time to time there will be variations in demand and supply for commercial rentals. Factors that are prone to increase the demand of commercial rentals are not vividly foreseeable, which becomes difficult to determine the value of these commercial rentals. Other practical factors that pose a challenge to valuation of commercial rentals is lack of adequate data. Collection of property data is a very demanding since it requires holistic and structural mechanism. As pointed out earlier some of the information provided is not credible and this makes one to question the validity of information system. Some of the reason why there is provision of untrue information is reasons such as contemplation of property tax evasion or land rates evasion. In this case a huge challenge is experienced by the valuers in determination of ideal price of a particular commercial rent. Q2: Rental analysis and capital valuation The four shops are of different sizes and their rent is as indicated in the analysis below. Rents are: Comparable R1 £29,000 Comparable R2 £17,500 Comparable R3 £10,500 Analysis of Rents Comparable R3 Frontage 5 metres; depth 8 metres Area of the zone is 40 sq.m Let at £10,500 = £262.5 per sq.m Comparable R2 Frontage 7 metres; depth 16 metres Accept depth of first zone as 8m at a rent of £262.5 per sq.m The area of the zone is 7m by depth 8m = 56 sq.m The rent is 56 sq.m by £262.5 per sq.m = £14, 700 The remaining 8m is thus worth; £17,500 less £14, 700 = £2,800 Since the area of this second zone is 7m by 8m, the area of the one is 56 sq.m. Thus, the rent is equivalent to; £2,800  56 sq.m. = £50 sq. m. Comparable R1 Frontage 12 metres; depth 20 metres Accept depth of first zone as 8m at a rent of £262.5 per sq.m And the second zone at a rent of £50 sq. m. This equals: Frontage 5 metres; depth 12 metres Area of the zone is 60 sq.m 60 sq.m at £262.5 per sq.m = £15,750 The second zone is the next 8m of depth, that is 8m x 12m = 160 sq.m Area 96 sq.m at £50 per sq. m. = £4,800 Hence the remaining depth of 4m which is equal to; £15,750 + £4,800 = £20, 550 £ 29,000 pa - £20, 550 = £8, 450 This zone is 4m deep and 12m wide, Area 48 sq.m. Hence, the rent is £8, 450 divide by 48 sq.m. = £176 per sq.m. The analysis shows that the three zones have different values. As such, for the case of this room which requires rent analysis, it will have three zones. Frontage 8 metres and depth 18 metres Zone A: depth 8m, Value £262.5 per sq.m. Zone B: depth 8m, Value £50 per sq.m. Zone C: depth is 4m, value is £176 per sq.m. Valuation of Shop number 7 is therefore: Zone A: 8m x 8m = 64 sq.m. @ £262.5 per sq.m. = £16, 800 Zone B: 8 m x 8m = 64 sq.m. @ £50 per sq.m. = £3, 200 Zone C: 8m x 2m = 16 sq.m. @ £176 per sq.m. = £2,816 Total Rental Value £22, 816. Valuation The room to be let at £22, 816 per annum on a 10 year FRI lease. A similar room was let 6 months ago at a yield of 5.2%. Therefore, the room’s investment is 5.2% . Rent received = £22, 816 YP perp 12% = 5.2% = £118, 643 Bibliography Mackmin, Shapiro and Sams (2013) Modern Methods of Valuation, 11th edition, Estates Gazette (Routledge). Davidson, A.W. (2013) Parry’s Valuation and Investment Tables, 13th edition (Not essential but very helpful and will be permitted in the examination). Millington, A. (2001). An Introduction to Property Valuation, Estates Gazette, 5th edition Wyatt, P. J., (1995). Using a Geographical Information System for Property Valuation, Journal of Property Valuation & Investment, Vol. 14 No. 1 67-79 Yomralioglu, T., (1993a), The Investigation of a Value-based Urban Land Readjustment Model and its Implementation Using Geographical Information System, PhD. Thesis, Department of Surveying University of Newcastle upon tyne, UK. Read More