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VALUATION OF COMMERCIAL PROPERTY IN PRIME MARKET AREA!; BY- VALUER ALHAD DESHPANDE

VALUATION OF COMMERCIAL PROPERTY IN PRIME MARKET AREA!

AUTHOR: Er. ALHAD DESHPANDE

Friends, we all have come across a situation where we are asked to value a commercial property on high street at prime location. This is an interesting situation where there is going to be lot of debate and perspective towards valuation of such special assets fetching excellent business income as well as rental income.
The methodology adopted for such valuation is income approach only method because cost and market approach are inappropriate methods to value such special commercial assets fetching excellent income.
The valuation process includes;
1] Collection of data regarding rents, sale etc. from nearby similar properties.
2] Analyzing the collected data like rental transactions, daily, weekly and monthly rents etc.
3] Calculations and results
4] Concluding remarks
We will discuss all 4-parameters one by one!
1] Collection of data regarding rents, sale etc. from nearby similar properties.
Suppose we want to value a commercial shop of say 500 sqft. area, we have to collect all sale, rental transactions in same area for govt. sites along with inquiries with nearby shop owners, tenants regarding pattern of rent system in said locality, whether daily, weekly or monthly basis and expectations of owners as well as tenants.
If we go through in depth of the situation, many times, specific type and class of business are being run in such area like departmental store, hotel, jewelry shop etc. so similar business or brands can also perform excellent business in such market.

2] Analyzing the collected data like rental transactions, daily, weekly and monthly rents etc.
After collecting the rental and sale data, we have to arrange it in either ascending or descending order so that we can easily visualize the minimum and maximum considerations being paid and received by people/merchants.
In sale/transfer, full consideration paid is not shown on paper by both parties, so such data even though of registered one has to be tallied with rents received and paid in surrounding.
Suppose shops ranging from 400-700 sqft. are sold at say 40-70 lacs range , it clearly indicates that full market value is not appearing on document to take advantage of stamp duty expenses and business turnover ,balance sheet etc. After conducting market inquires , we come to know the actual market value being paid but still same has to supported with valid proofs so that our assessment is impartial , bias and without any interest !
3] Calculations and results;
After arranging and analyzing the collected data, the calculation process starts;
If the daily rent received for 500 sqft. shop is say 5000/day , weekly rent is say 28000/week and monthly rent say 1,00,000/-
The process of charging rent depends solely on type of activity and class of business with output from it, the daily rent is always highest as compared to weekly rent and monthly rent.
We also have to check possibilities of highest rents received after studying rental performance of asset in daily, weekly and monthly basis, considering the actual operation and non-operation chances, in any week, there may be a holiday or slack day where asset will not fetch much rent. Such period have to be studied carefully to arrive at best possible rent, the asset can fetch!
Suppose after studying all the possible rental patterns, we come to know that such commercial asset can safely fetch rental income of say
1,20,000/month including the daily weekly rental patterns , we have to deduct the expenses like operating cost, corporation taxes, maintenance , repairs, staff etc. if any of say 15-20 % ,
i.e. 20000/-
Net rental monthly income for owner becomes
= 1, 20,000/-[-] 20, 00,000/- = 1, 00,000/month
= 12, 00,000/year
Capitalizing the net annual income 12, 00,000/year @ say 6 % i.e. Y.P.= 16.66
VALUE works out to be = 12, 00,000/- [x] 16.66 = 2, 00, 00,000/-
[Two Crores only], so sale transaction of similar shop in same or nearby area of say 70,00,000/- is not real one and hence proper valuation will be by income approach and not market approach !
4] Concluding remarks;
As we know, there are three approaches for valuing an asset
Cost, market and income approach. Each method has its own significance and importance so has to applied in specific situation only so method and approach of valuation changes according to the situation!
It is needless to say that, the example shown above has to be read only for understanding the concept of valuation and such example is an imagination only!

ABOUT THE AUTHOR

Er. ALHAD DESHPANDE

B.E. [CIVIL], M.I.E., F.I.V., M.O.V.

IBBI REGISTERED VALUER

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