Commercial properties such as shops, offices, storage rental, workshops, retail property etc are valued using the income capitalisation method of valuing.
The income capitalisation method of valuing treats the property to be valued, as an investment property where the main motivation for ownership is the income that the property generates. This is typically the approach an investor would use.
The income capitalization method of valuing is based on the capitalization of the nett income generated by the property and is achieved by the algebraic manipulation of the formula Value = Nett Income / Capitalization Rate . The capitalisation rate, is determined by analysing sales of similar commercial property in the same area.
If you anticipate purchasing a commercial property the seller should be able to provide you with a valid lease and a detailed income and expenditure (income statement) for the subject property. If this information is not available the valuation can still be completed using information available in the market.
