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How to make better commercial property valuations with the right comparables

Property Businessman Looking at Data on a Laptop


Thanks in part to the new permitted development rights, commercial property opportunities are increasingly profitable. However, most investors encounter problems with having a clear view of how much a property should be worth.

The challenge? A lack of comparable commercial property data.

Yet comparable evidence is at the heart of virtually all property valuations. That’s why the process of identifying, analysing, and applying comparable evidence is so important. 

This article explores how to increase and speed up valuations and appraisals for commercial properties.

But first, let’s explore a quick definition.

What are comparables? A quick definition:  Comparables or ‘comps’ for short, can be defined as an item of information (such as sold price or square footage) used during the property valuation process as evidence to support the valuation of another similar property. 

Key challenges with commercial comparables:

  • A limited number of available comparable transactions

  • A lack of up-to-date evidence

  • Lack of similar or identical evidence 

  • Information is hard to find and consolidate

 

The challenge with commercial property valuations

Without comparables, valuations are virtually impossible.

Here’s why: Comparables give you more confidence in the end value, whether that’s a formal red book valuation or running appraisals for schemes you are considering developing.

The challenge is that there is a distinct lack of comparables, and they are often very hard to find.

In some cases, the occupiers that you are negotiating with have all the comparables. For instance, how do you value a Kwik Fit or Tesco Express when they are the only building of that sort in that town?

On the other hand, surveyors, investors, and developers will often rely on the hearsay of deals being done or particulars from properties being marketed. Often this is without a complete market analysis of all of the relevant deals that have been done. 

In essence, the hardest part of any valuation or appraisal is finding the evidence to support the valuation. It’s key to know who has done a relevant deal (agent, owner or occupier) and on what terms to hang your valuation off.

But that’s not all.

Occupiers will often try to keep deals quiet. As a case in point, they may keep deals quiet if they set new headline rents that may be quoted back to them at a rent review on their existing portfolio. 

Hence why having access to comps is so difficult, but also so important to get your valuation right.




How to make more confident valuations and appraisals

The flip side is that all freehold property deals or leasehold deals over seven years are registered with the Land Registry. 

This includes the price freehold transactions went through at, and signed copies of leases where the term is over seven years. You can buy and read these to understand the true terms of the deal.

But wading through reams of information is time-consuming. In today’s highly competitive market, you need to make fast and accurate decisions. 

This is where PropTech comes in. 

Some PropTech solutions can gather this information and serve it back to you all in one place. Information is overlaid with property sizes from particulars, EPCs, or rates assessments to provide a clear comparable.

You can also search between all freehold and leasehold deals using the information from when the transaction was registered and overlay it with sizing information which was put together for other uses.  An example of this would be an EPC which was put together when the property was let or sold.

What’s more, when a freehold deal is transacted or a lease over seven years is taken, the Land Registry takes details of that transaction against the corporate portfolios that they form part of. 

This shows the recent deals they have done and provides comps for what deals KwikFit or Tesco Express, for instance, have done in similar towns and in similar stores.

Through PropTech, you can quickly and easily access this information through an online portal (24/7) without the need to search multiple places or ring people that may have done the deal. 

Facts are provided through the legal registration process and objective measurements around the size of the building. This means that comprehensive factual evidence can be found to support those valuations. And when done in a single portal, the time saving is immense.


Residential valuation considerations

While you can quickly find quoting prices and sales prices for residential (think Rightmove, Zoopla) it can be an intensive process. You often need to interrogate the sizes of the properties from the floor plans (attached to the particulars) to work out the residential values per square foot. 

Like with commercial valuations, ideally, you want a single portal to scan through the deals that have been done for the right size and use this for the properties you are dealing with. 

In addition, you want to see a comprehensive history of the acquisitions that a company and/or their competitors have entered into where sizes and pricing are easily accessible.

Plus, you need residential sales prices and sizes that are easily searchable for establishing rates per square foot quickly. This is more efficient than bouncing from website to website, trying to pull the info together -  without knowing if the set of comps you are looking for even exists.

🔎Why are residential values relevant to commercial properties? 

Essentially, this is necessary when you’re trying to establish the vacant possession value of commercial buildings or whether the commercial building might convert into residential use.

As an interesting side note: the value of the surrounding residential properties is critical and yet often PropTech solutions only have either commercial or residential values. They are expensive, don't have a price per sqft, and you have to use multiple sources.

 

In summary

So many things affect commercial property values, but one key metric we can all agree on is comparables. That’s why property investors and developers know that finding comparables is a crucial part of the process of valuing a property. 

Here are some final tips when using comparables. 

 

Final tips:

  • First and foremost, it’s key to find comparables that are as recent as possible.

  • Try to avoid comparables that are older than 18 months as markets can rapidly change on a local level.

  • We recommend that you aim to find at least 10 comparable properties to make the averages reliable. 

  • For any comparable to have any relevancy, of course, it needs to be similar in design, size, and location to the subject property - for example, period properties may sell for more than 1970’s properties of the same size.

  • Beware of ‘sold subject to contract’ comps that are yet to be completed - these are useful but not as reliable as sales that have been completed.

Thankfully, it’s quicker and easier than ever before to identify comparables with Nimbus Maps' powerful comparable data. 

You can start by entering the postcode of the property you want to find comparables for and then define the radius that you want to capture data from. 

Watch a demo now to see it for yourself.

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