Valuing a light industrial unit, with leaseholder

[tight fart]

I have a light industrial unit, I own the freehold and have a tenant who has is 5.5 years into his 10 year lease.
Would it be valued on a multiple of the rent he pays? (£12k per year)
I'd quite like to sell but not sure if
a, its the sort of thing investors look for.
b, would it be worth more without a tenant.

[trickywoo]

Their will be a demand as commercial is the only property that can be held in a pension, besides the whole rent v buy market.

I’d trawl the local commercial property agents websites for asking prices on similar properties. Failing that you may need to get it valued by one.

[loafer123]

Depends on location, size, rent paid versus value, how good the tenant is and many other factors.

Happy to take an informal look if you want to PM me.

[surveyor]

Your value depends on two things:

Current Rental Stream: How secure the tenant is. Any rent reviews. Terms of Lease. etc. Whether it is over or under rented.

Reversion: what is the market value when the lease ends, PV'd back to present day.

It is possible to desktop, but your local agents are very unlikely to charge you for coming out and giving an opinion and will know which local suspects are in the market.

I'm not sure what the investment market demand is - I suspect it will depend if it is shiny or dirty industrial. Owner occupier demand is strong.

[tight fart]

Thanks, I guess I was looking at it backwards thinking an investor would look at the return on investment first.

[surveyor]

It's all about the comparable values of the rental streams, the property and ultimately investment returns.

A conventional valuation will value rent passing until the next rent review. The Yield will be adjusted depending on whether the property is over-rented (risky) or under-rented. If it's over-rented the tenant covenant needs to be considered as that overage would be lost if the tenant went bump, Overall lease terms also get chucked in.

At Rent Review the rent should revert to Market Value unless it is over-rented (assuming upwards only reviews). The rental stream can then be valued into perpetuity, but adjusted back to allow for the time you have to wait for the review. If it's over-rented so rent will fall, then the adjustment may not occur until expiry - or there are different ways to value the property.

It is far more complicated than simple rules of thumb, and far more complex than residential valuing.

[Elysium]

surveyor said:

It's all about the comparable values of the rental streams, the property and ultimately investment returns.

A conventional valuation will value rent passing until the next rent review. The Yield will be adjusted depending on whether the property is over-rented (risky) or under-rented. If it's over-rented the tenant covenant needs to be considered as that overage would be lost if the tenant went bump, Overall lease terms also get chucked in.

At Rent Review the rent should revert to Market Value unless it is over-rented (assuming upwards only reviews). The rental stream can then be valued into perpetuity, but adjusted back to allow for the time you have to wait for the review. If it's over-rented so rent will fall, then the adjustment may not occur until expiry - or there are different ways to value the property.

It is far more complicated than simple rules of thumb, and far more complex than residential valuing.

(100 / yield) * annual rent = value

All the stuff surveyor wrote is a factor in determining the yield an investor would be willing to accept. That’s the tricky bit.

Edited by Elysium on Saturday 3rd March 22:02

[soxboy]

tight fart said:

I have a light industrial unit, I own the freehold and have a tenant who has is 5.5 years into his 10 year lease.
Would it be valued on a multiple of the rent he pays? (£12k per year)
I'd quite like to sell but not sure if
a, its the sort of thing investors look for.
b, would it be worth more without a tenant.

Some useful guides from others and it depends on a lot of variables, however in answer to your points above if we use a bit of fag packet valuation If we work off a passing rent of £12k at a yield of 10%* it will give a capital value of £120,000. It is likely to be of interest to investors as it will be of a relatively low lot size that can be put in a SIPP, will not attract stamp duty and may not require bank lending.

It may also be of interest to owner occupiers (in my part of world massive shortage of industrials) but you have a tenant who has 4 years left on his lease so will be a while before you get vacant possession and even then the tenant is likely to have right to renew the lease.

• I have valued two industrial units this year, each only a few miles apart. One was decent and had sale agreed at 7.5% yield, the other was shagged and sale agreed at 22%!

[elanfan]

Offer it to the tenant. He already will be paying you £48k+ over the next 4 years and having nothing to show for it at the end. He is possibly be your best customer.

[Jockman]

keep your eye on stamp duty on the lease too. You may be ok at this level. We were less fortunate.

[tight fart]

Elysium said:

(100 / yield) * annual rent = value

All the stuff surveyor wrote is a factor in determining the yield an investor would be willing to accept. That’s the tricky bit.

Edited by Elysium on Saturday 3rd March 22:02

But you've got 2 unknowns in the sum, you don't know the yield unless you have a value?

[Elysium]

tight fart said:

Elysium said:

(100 / yield) * annual rent = value

All the stuff surveyor wrote is a factor in determining the yield an investor would be willing to accept. That’s the tricky bit.

But you've got 2 unknowns in the sum, you don't know the yield unless you have a value?

The first step is to idenitify the market rent, based on transactional evidence.

Then you determine the return that an investor is likely to require, taking into account all sorts of external factors (size, quality, location, tenant covenant, remaining lease length, unusual lease conditions, differences between actual and market rent etc).

That return is called the yield and it determines the value. So when agents talk about valuation, it is usually by reference to yields rather than actual pricing. They also talk about 'multipliers', which is 100/yield. So at a yield of 10% a properties value would be 10 x the current annual rent.

Valuations are based on an income stream 'in perpetuity' and the yield reflects the risk to the investor. The higher the risk, the higher the yield and so the lower the value.

Edited by Elysium on Sunday 4th March 08:47

[tight fart]

The rent is the only figure I have to work with, the unit is one of 13 on a nice clean site built around 1988.
The last unit on the open market was in 1990 at £110k.
(They are all identical 1250 sq ft, 10 x owner occupied 3 let)
I don't think commercial property shows on property price websites so don't know what other have reached since.

[soxboy]

If you know the neighbours well enough it may be worth asking if any have had theirs valued lately? It is likely they may have had to be valued either for pension fund values or raising finance so that may give you a guide.

If three have been let, were any let recently? May be worth asking the letting agents to give you an idea of capital value.

There is a commercial page on Rightmove but nothing that gives a reliable indication of sold prices.

[fridaypassion]

elanfan said:

Offer it to the tenant. He already will be paying you £48k+ over the next 4 years and having nothing to show for it at the end. He is possibly be your best customer.

This. Screw investors business owners will be banging your door down for a leasehold. Round here there is nothing. All sewn up by old money families. Most annoying.