Retail Property Valuation: a Brief Overview

Retail property valuation is the valuation of retail premises defined by the Retail Leases Act 2003, as a premises that is used entirely or mainly for:

selling or renting retail goods or provision of retail services or
operating a particular business or a particular type of enterprise that the responsible Minister decides, based on the type of enterprise, tenant or lease.

Typical examples of retail properties include:

shopping centres
shop lot(s) in a shopping centre
neighbourhood shops ("milk bar")
automotive showrooms

shop(s) on a retail strip
freestanding supermarket
large format retail stores
shop in a mixed-use building

Although not mandated in the International Valuation Standards (IVS), a retail property valuation usually combines two of the three primary methods of valuation used by retail 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 retail property valuation 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 retail property.

Retail Property Valuation - Income Capitalisation approach

This method bases the valuation of the retail 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 a valuation using the income capitalisation method, these two crucial considerations must not be overlooked:

If the retail 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 retail 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 the valuation of commercial properties including retail premises.

Sales Comparison approach

Sometimes referred to as a Market Comparison Approach, using this method of valuation, the value of a retail 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 retail property using the sales comparison approach, two key considerations are:

Only consider settled (fully paid) sales; retail 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 retail property valuers when preparing a retail property valuation.

Cost method or Summation approach

This method of 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.

The method 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.

The Cost Method or Summation Approach is not suitable for retail properties that form part of their parent building or complex such as a shop lot in a shopping mall or mixed-use building.

Factors to consider for a Retail Property Valuation

When conducting a valuation, the retail 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)
adaptability for changed/future use
showroom/display space

quality of fitout
car parking spaces
building area
age/condition of improvements
amenities

Site

land area
street frontage
excess and surplus land for future expansion

Location

foot traffic
exposure
neighbouring shops
market catchment area
public transport
nearby street parking/public carpark

Market

retail market conditions
retail market rents and yields
new retail 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

**Why appoint AskTheValuer to value your Retail Property?**

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 retail property will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.