Estimate Occupied walls
The valuation of your occupied / rented walls allows you to have an opinion of the value of your product. The objective of this valuation is mainly to be able to put your occupied walls up for sale at the market price. This allows them to be sold in the shortest possible time without further negotiations.
The different valuation methods
The value of commercial premises or buildings can be calculated in several ways. Firstly, it is important to know that a distinction must be made between the valuation of empty and occupied walls. Indeed, the valuation of empty walls is calculated using several methods which are then weighted in order to find the fairest possible price according to market trends. In contrast to occupied premises, the value of which is calculated mainly using a single method: the yield. Indeed, the investor who buys occupied premises will be looking for an interesting return, and in an investment certain criteria are studied before others, such as profitability and rent. Other information is of capital importance such as the location or the sector of activity. These are not negligible because having a substantial rent is certainly important but not sufficient because as long as the lease is in progress this data takes precedence but if the tenant's lease is not renewed it is possible that there will be a significant rental vacancy due to the difficulties in finding a tenant on the terms of the property. Thus, the combination of certain information must be carefully studied in order to ensure the durability of the investment.
Evaluation of the value of the premises using the yield method:
As previously explained, in the context of the valuation of occupied premises, whatever the type of asset, the most commonly used method is the yield method. On average, investors expect a minimum yield of 5%. To find the price they would be prepared to pay, simply divide the annual rent before tax by the expected return. Find out more about the method of estimating property by yield in our article How to calculate the value of your occupied premises? Conversely, if you are an investor and not a seller and you are looking to determine the return on an investment, see our article Calculating the return.
What are the different elements that vary the value of occupied/rented premises?
There are a number of factors that can affect the value of occupied premises. In order to be more rigorous, it should be pointed out that these elements do not necessarily increase the sale price directly. The difference is that investors are prepared to acquire properties with a return of less than 5% if the property in question meets certain criteria that we will see shortly, which will make the product in question what we call products in prime locations.
Among these elements the location within a city is very important. Indeed, depending on the neighbourhood, the exposure and the type of asset, the desired location may vary. For example, the choice of location for offices will not be based on the same criteria as for commercial premises. In fact, retail premises will seek visibility in busy streets with visible and accessible shelf space, etc. To conclude, each type of asset has its own location criteria, the more they are respected, the more the location is considered as a premium and therefore investors are ready to reduce their expectations in terms of profitability. Discover all our advice concerning the location within a city in our property sheet: How to define the commercial location?
In the case of occupied commercial premises, the activity of the operation will inevitably vary significantly the return expected by investors. Certain activities tend to reassure investors, either for personal reasons or because certain activities are considered more sustainable. This is a guarantee of security for the investor with a maximisation of the chances that the rent will be renewed at its expiry date and therefore no rental vacancy while a new operator is found. This aspect of continuity is particularly important during the COVID period when shops considered essential can remain open despite curfew and lockdown. This means that there will be no stoppage of activity and probably no suspension of rents. Finally, some activities are not only safe but also have a very good image in the investment community; notably crèches or world famous franchises such as Mac Donald's where investors are prepared to go down to a lower profitability.
The rent is the most important lever. In particular because it allows the walls to be valued using the yield method but also because it allows investors to project themselves when they discover the property. But beware, there may be both under- and over-renting, which can either frighten the investor who, in the event of the departure of the current tenant, will find it difficult to find a tenant prepared to pay a rent that is too high in relation to the market price. In this case, the initially calculated return will be wrong. In the case of a sublease, this is a real bargain for investors who will be able to revise the lease and thus achieve a very interesting return, but not for the owner who will therefore obtain a price for his property which does not reflect what he could have obtained.
The rent is governed by the commercial lease. Indeed, the lease is a legal act, a contract that defines the relationship between the owner and the tenant. It is therefore very important for an investor in occupied premises to study the commercial lease as a priority. It is often the main element of the study of the file, a badly drafted lease can scare off an investor despite a good return. To study a commercial lease, you can consult our article: How to study a commercial lease.
Other elements of study are necessary when investing in occupied premises. The study of the commercial lease is part of a larger study: the study of the tenant's file. Whether it is for the purchase of occupied premises or to find a new tenant one day, the study of the tenant's file is essential in order to limit the risks of non-payment and above all to ensure the durability of the rental. To do this, see our article: how to study a tenant's file.
The type of occupation will also have an impact on the value of the property. Indeed, depending on whether the property is residential or commercial, the assessment of certain information will be different, such as the lease, for example, with the differences between the residential lease and the commercial lease. For more information, see our article on this topic: Residential or commercial property?
In connection with location, the city you choose for your investment has an important influence. The size of the city, the population, the activities available in the city, etc., are all factors that influence the choice of a city. To find out more, see our property sheet: Which city should I choose for my rental investment ?