Valuers undergo many challenges related to physical, economic and practical factors while determining market rents for commercial properties. Market rent refers to the estimated cost of leasing a real property on the valuation date between a willing lessor and willing lessee following the laid down lease terms (RICS, 2014). Property valuers are among the major emerging global professionals requiring extensive knowledge and skills on real estate management. Moreover, property valuation heart of real estate management. Most nations follow international valuation standards in order to avoid conflicts that arise between the valuer and the client, or the real estate owner. The international valuation standards aim at facilitating cross-border transactions and maintain the stability of the international property market. Additionally, international valuation standards act as professional benchmark for valuers all over the world by enabling them respond to demands of the international property market. Finally, the international valuation standards offers and standardized financial reporting framework that meets all the needs of new and emerging real estate businesses in different countries (Ngungu, Makathimo, and Kaaria 2002).
In order to effectively value the market price of a real estate property, the valuer must comply with professional standards (PS) and valuation practice statements. Valuers who fail to adhere to the set standards always encounter many valuation problems.
The main sources of problems for commercial property valuation are incorrect stated facts, improper rent projections considering prevailing market rent, wrong assumptions, and economic status (Smith 2002). Firstly, illiquidity and low levels of market activity leads to valuation challenges caused by lack of relevant market data. The valuer must have up to date market data of the prices of various real estates depending on physical location and size of the building. Location of the real estate to the nearby infrastructure such as roads, market, water, or electricity determines the cost of renting building in such an area. Valuers face major challenges if changes in liquidity or market activity change a day after giving the real estate lessor the market price of the property. The valuation approach needed in such cases requires the use of adjustment techniques depending on market changes or the characteristics of the asset in question (RISC 2014).
Secondly, the economic status of various countries introduces major challenges to valuers when it comes to determining the rent of a commercial property. The major economic activities practiced by people of a specific country determine their income levels, or the amount of rents one can afford. Economies that depend more on agriculture have different rates of real estate valuation compared to economies that depend on industrial production. Valuers experience difficulties are establishing major drivers of the economy for people living in specific areas leading to undervaluation or overvaluation. On the other hand, the unpredictable financial situations experienced in some economies especially developing countries affect valuer’s decision-making process. A person rents a real estate property based on the tax position of the country of residence and personal desires. In most cases, people lease real estate properties as equity (Cannaday & Colwell n.d).
The issue of HM Revenue and Customs (HMRC) challenges valuer’s decision of determining the rent value of a real estate. HMRC website offers guidance to house valuers on the basic processes to follow while determining the amount of rent to charge people at different real estate locations. HM revenues affect the valuation process because they dictate the amount of tax expected from the property owner. The valuer must be keen to include taxes and other government revenues as stated in the valuation standards and policies before arriving at a final figure. On the other hand, the valuer faces major challenges balancing between government requirement, the lesser and lessee (RICS 2012). The real estate owner wants the valuer to offer a rent value that will ensure a high return on investment. Additionally, the government wants the amount of rent charged for the real estate adhere to the rules, regulations, and policies of real estate valuation and leasing. Moreover, the lessee wants to rent a house that favors their pockets depending on the level of income. The above factors create more than normal challenges to valuers.
Finally, a real estate valuer encounters challenges associated to the assumptions made when determining the amount of rent to charge in a commercial property. Many assumptions are made regarding the state of the economy, the level of income of lessees, expected changes in government tax policies, and practical factors. Real estate auditors are mostly involved in the valuation process but do not have a much-needed expertise in real estate valuation (Smith 2002). Valuers work commerce mostly after the auditor has already given the real estate owner an estimated amount of rent that one should offer clients. The valuer encounters a major challenge questioning assumptions made by auditors considering that the auditor has been a presence since the start of the project. The valuer is forced to set a rent value almost similar to the auditor’s value. The decision of the valuer eventually brings major problems when changes in the country’s economy occurs requiring the real estate owner to even pay more taxes to the government.
Before renting any commercial property a client should put into consideration many concepts. Real estate owners construct commercial rental houses in areas where they see the potential of getting more tenants. The role of commercial building valuer is to ensure they set rent standards that favor potential clients. On the other hand, the location of the building from the infrastructure matters a lot when it comes to leasing a commercial building, especially for business purposes. Location is the key thing that matters in a real estate investment and leasing. The location of a business premises has significant impact on transport and production cost. The nearer the shop to the main transport route the lower the cost but the higher the rate of leasing (Manganelli 2014).
Nobody would prefer renting a ten bed roomed house with heated swimming pool, constant water supply, and costing 70 percent the normal rate but located near a garbage site. Such a house would be worthless unless the investor decides to get rid of the garbage and make the environment clean for human habitat. Desirability is the main factor that makes the location of a building valuable. People’s desire while looking for a commercial building or real estate is a building located in a secure area, location near main highway, railway, or seaway and water supply, location with favorable climatic conditions, and a location near major infrastructure like market, school, healthcare, and recreation facilities. People tend to pay more for the property located in the ‘right’ neighborhood; however the definition of the ‘right’ neighborhood matters between individual investors.
The retail property currently on the market according to the description provided it is located in the right position, near a major rail terminus. See figure 1. The owner of the retail property only leases his commercials to local retailers and a few national chains. The location and placement of the shop in the building would attract any investor aiming at starting a business in a suitable environment near a good flow of customers from different terminus. Understanding new rental rates for real estate commercials requires knowledge of many factors as shown on the table in appendix I. These include address of the building, relative location, dimensions, lease basis, the status of the lease, and the number of days that have passed after the agreed date of lease (RICS 2014).
Comparables R1, R2, and R3 shown in table 1 represents yield evidence for the expected amount of rent the client should pay depending. The yellow shading on table 1 shows the specific characteristics and lease agreement for the vacant shop. According to Abraham (2014), the Sales Comparison Approach is the most effective mode used by real estate valuers in calculating the amount of rent to charge a client especially for residential and commercial real estate. The following rent estimation process assigns a relative price value to a property. Price is always determined by the size of the building to be rented. The above analysis shows that the size of the building determines the amount of rent. For example, the available property measures 8 meters frontage and 18 meters deep.
Size of the property = 8m by 18m. The shop is 144 square meters. The address of the property falls under comparable R1 because it is located in No.7 station road. On the other hand, the property is just a few meters from the rail terminus, approximately 50 meters from the terminus. The area of the building is 8m by 18m. A frontage of 12m and a depth of 20m is selected because selecting smaller dimensions would interfere with the actual calculations. The property is meant for commercial use by locals or internationals under specific terms. Comparable R1 still takes charge. The status of the property is new leasing, hence falling under comparable R2.
Most new investors focus more on potential income a property is capable of generating and ignores other important aspects such as effective rent calculation. Determining the standard amount of rent to charge clients for commercial buildings is an important aspect (Tyson & Griswold 2005). No tenant can risk losing one tenant or all tenants because the price offered is not compatible with the type of house. Comparative R2 shows that the property was sold 18 months ago at a rent of 14,000 U.K. pounds. After the tenant left, the property achieved a 5.2% yield. The following property will be leased at 29,000 pounds per annum and the agreed date was three months ago.
Capital valuation of the property
Buyer’s profits and risks are covered through capital value on the valuation date achieved through reflecting on risks associated with renting a business premises. A business person aiming at purchasing this property may use debt finance that promotes capital valuation of the property. Additionally, the government will need capital valuations for tax purposes. Capital valuations are needed whenever the business property faces a compulsory acquisition or when the compensation payments mature (Wyatt 2013).
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CANNADAY, R., & COLWELL, P. (n.d.). Real Estate Valuation Models: Lender and Equity Investor Criteria. Real Estate Economics,316-337.
MANGANELLI, B. (2014). Real estate investing: market analysis, valuation techniques, and
risk management. http://dx.doi.org/10.1007/978-3-319-06397-3.
NDUNGU, K., MAKATHIMO, M., and KAARIA, M. (2000). The challenges in globalization of valuation profession-Lessons from Kenya, Nairobi. Washington D.C.: FIG XXII International Congress
RICS. (March, 2012). RICS Valuation – Professional Standards Incorporating the International Valuation Standards. Available at http://www.rics.org/uk/shop/
RICS. (2014). RICS Valuation –Professional Standards January 2014. Incorporating the International Valuation Standards. Available at rics.org/standards
SMITH, E. S. (2002). Commercial real estate: Understanding investments. Chicago, Dearborn
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TYSON, E., & GRISWOLD, R. (2005). Real estate investing for dummies. Hoboken, HJ: Wiley Pub.
WYATT, P. (2013). Property valuation. Accessed December 11, 2014 from
http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=577225. Appendices Appendix I: Table showing rental evidence for real estate property management