Industrial Real Estate Valuation: a Brief Overview

Industrial real estate valuation can be very complicated due to the large variety of industrial property and the factors that affect their value. Industrial property, a subset of commercial property, includes:

warehouses/distribution buildings
factories/manufacturing plants
refrigeration/cold storage buildings
truck/bus terminals
showroom buildings

storage yards/hardstand
R&D facilities
food processing facilities
data hosting centres
and more

Most industrial properties incorporate an office component or other accommodation, the use of which is incidental to its primary activity. <More>

Although not mandated in the International Valuation Standards (IVS), an industrial real estate valuation usually combines two of the three primary methods of valuation used by commercial property valuers to obtain a sound estimate of the value. These two methods are:

Income Capitalisation Approach
Sales Comparison Approach

When there is little sales data, a valuation of an industrial property can also use a third method of valuation, that is, the Summation Approach or also known as the Cost Method as a check method to determine the value of the industrial property.

Industrial Real Estate Valuation - Income Capitalisation Approach

This method bases the valuation of the industrial property on its projected future rental income plus any recoverable outgoings, and then deducts all unrecoverable outgoings and expenses, including suitable allowances for vacancies, to arrive at the net income from the property. This net maintainable income is a forecast of earnings that are assumed to last in perpetuity and is discounted using an appropriate capitalisation rate (or cap rate) derived from comparable sales evidence.

When conducting an industrial real estate valuation using the income capitalisation method, these two crucial considerations must not be overlooked:

If the industrial property is considered to be vacant at the date of valuation, an allowance is included in the vacant possession assessment to for costs associated with letting-up and lease incentives.
If the passing rental of the industrial property is not equal to its market rental, adjustments must be made for under- or over-rents.

The Income Capitalisation Approach is frequently used as the primary method in an industrial real estate valuation.

Sales Comparison Approach

Sometimes referred to as a Market Comparison Approach, using this method of valuation, the value of an industrial property is determined by examining sales data from comparable properties (a.k.a. comps) and comparing those comps with the property being valued.

When assessing the value of industrial property using the sales comparison approach, two key considerations are:

Only consider settled (fully paid) sales; properties that are under contract or currently on the market should only be taken into account when there is little to no other market evidence.
In practice, properties are rarely comparable, necessitating adjustments in the comparison process that introduce some degree of subjectivity.

The Sales Comparison Approach is frequently used as a secondary method by industrial property valuers when preparing an industrial real estate valuation.

Cost Method or Summation Approach

This method of industrial real estate valuation involves the summation of the depreciated replacement cost of improvements (that is, comprising the main building and other ancillary structures and built areas) to the underlying vacant land value to determine the property's value.

This method of industrial real estate valuation is affected by these three main issues:

The rate of depreciation and cumulative depreciation.
Construction costs
The added value of the improvements may be quite different from their replacement cost.

Factors to Consider for an Industrial Real Estate Valuation

When conducting an industrial real estate valuation, the property valuer must consider many factors and it is vitally important to understand these factors, as they will affect the valuation. Some of these are listed below:

Physical Characteristics

Improvements

construction/structure (example: concrete tilt-panel, brick, metal)
any additions, extensions or renovations
freestanding or shared wall(s) with neighbour(s)
height and clear span of warehouse
adaptability for changed/future use
office component and quality of fitout

car and container parking
building area
age/condition of improvements
loading bays and canopies

Site

land area and street frontage(s)
topography and shape
availability of excess or surplus land
secured yard area
potential flooding

Location

access to main road linkages
access to good skilled workforce
neighbourhood character
exposure for advertising

Market

current market conditions
market rents and yields
new stock entering the market
recent comparable sales

Tenancy

leased, vacant or owner occupied
single or multi-tenanted
if leased, term of lease, outgoings, options, rent reviews
outgoings

**Why Appoint AskTheValuer to Carry Out an Industrial Real Estate Valuation?**

You will be getting more than a 'standard valuation'. A Hidden Value Property Check-Up will be included as a bonus.

< Find out how AskTheValuer gives you more than a standard valuation >

< Find out what's a Hidden Value Property Check-Up >

The valuation of your industrial property will be performed by the independent Principal Valuer @ AskTheValuer, an experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. <For more details about the valuer>.