How Is a Commercial Property Valuation Conducted?

Introduction

If you've never commissioned a commercial property valuation before, you might imagine that the process simply involves a valuer inspecting a property and providing an opinion of its value.

In reality, a professional valuation involves far more than a site inspection.

Before arriving at an independent opinion of market value, a Certified Practising Valuer follows a structured process that includes understanding the purpose of the valuation, inspecting the property, researching market evidence, analysing relevant information, selecting the most appropriate valuation methodology and applying professional judgement.

Each step contributes to the reliability and credibility of the final valuation.

While every property and valuation instruction is different, the underlying process follows established professional standards and accepted valuation practice.

In this guide, we'll take you through the typical stages of a commercial property valuation and explain what happens behind the scenes before a valuation report is completed.

In This Guide

This guide covers:

• Defining the Purpose of the Valuation
• Confirming the Property Interest
• Inspecting the Property
• Analyzing the Market
• Researching and Gathering Information
• Selecting the Appropriate Valuation Methodology
• Reconciling the Evidence and Applying Professional Judgement
• Preparing the Valuation Report
• What a Professional Valuer Is Thinking
• Key Takeaways
• Frequently Asked Questions

The Commercial Property Valuation Process

The infographic below provides a simplified overview of the typical valuation process. Although every valuation assignment is unique, most commercial property valuations follow these key stages.

Infographic

Defining the Purpose of the Valuation

Every professional valuation begins with one important question:

"Why is the valuation being undertaken?"

The answer determines how the valuation will be conducted.

For example, a valuation prepared for mortgage security may differ in scope from one prepared for financial reporting, Capital Gains Tax, Family Law proceedings or a property acquisition. While the underlying valuation principles remain consistent, the purpose of the valuation influences matters such as the assumptions adopted, the information required and the format of the final report.

Before accepting instructions, the valuer will typically confirm:

• the purpose of the valuation
• the client and any intended users of the report
• the valuation date
• the property to be valued
• any specific requirements or assumptions.

Clearly defining the scope at the outset helps ensure the valuation is appropriate for its intended use and meets the client's requirements.

Confirming the Property Interest

Not every valuation relates to exactly the same legal interest.

One of the valuer's early tasks is to identify what interest in the property is being valued.

In many commercial valuation assignments, the interest being assessed is the fee simple interest, usually subject to vacant possession unless instructed otherwise. However, some valuations may require consideration of a leased interest, a lessor's interest, a lessee's interest or another recognised property interest.

The valuer will also confirm relevant ownership details, title particulars and any known encumbrances, easements, covenants or restrictions that may influence value.

Establishing precisely what is being valued ensures that subsequent analysis is based on the correct legal and property interests rather than assumptions.

Inspecting the Property

A thorough property inspection is one of the most important stages of the valuation process.

While photographs, plans, aerial imagery and online property data provide useful information, they cannot replace an on-site inspection. Visiting the property allows the valuer to observe features and characteristics that may not be apparent from documents alone.

During the inspection, the valuer is not simply taking measurements or photographs. They are assessing the property's overall utility, condition and appeal within the context of the local market.

Depending on the type of commercial property, the inspection may include consideration of:

• the location and surrounding environment
• land size, shape, topography and access
• planning controls or apparent development potential
• building size, layout and functionality
• constructionn quality and age
• condition, maintenance and presentation
• internal accommodation and fit-out
• car parking, loading areas and site improvements
• services, amenities and accessibility
• any apparent physical issues or factors that may influence value.

The valuer may also take measurements, verify building areas where appropriate, photograph key improvements and note any features requiring further investigation.

Although a property inspection provides valuable information, it is only one part of the valuation process. The observations made during the inspection must then be considered alongside market evidence, property data and other relevant information before an opinion of value can be formed.

Researching and Gathering Information

Once the inspection has been completed, the valuer begins the research phase.

This involves collecting and verifying information from a range of reliable sources to develop a comprehensive understanding of both the subject property and the surrounding market.

The information gathered will vary depending on the property and the purpose of the valuation, but commonly includes:

• recent comparable sales
• current leasing evidence
• title and ownership information
• planning and zoning controls
• land dimensions and site characteristics
• building approvals where relevant
• tenancy details and lease documentation
• market trends and economic conditions
• publicly available property records and mapping information.

Importantly, professional valuers do not rely on a single source of information.

Sales evidence may be cross-checked against government records, property databases and other reliable sources. Lease information may be verified wherever possible. Planning controls may be reviewed to better understand how they influence the property's existing and potential use.

This process of gathering and verifying information helps ensure that the valuation is supported by accurate and relevant evidence rather than assumptions or incomplete data.

Only after sufficient information has been collected can the valuer begin analysing how the market is likely to view the property.

Analysing the Market

Collecting information is only the beginning. The next step is interpreting what that information means in the context of the current market.

No two commercial properties are identical, so simply comparing sale prices is rarely sufficient. Professional valuers analyse the available evidence to determine which transactions are genuinely comparable and what adjustments, if any, may be required.

Factors that may be considered include:

• property type and highest and best use
• location and accessibility
• land size and configuration
• building area and functionality
• age, condition and quality of improvements
• planning controls and development potential
• lease terms and tenancy profile, where applicable
• market conditions at the date of valuation.

The objective is not to find identical properties because they rarely exist, but to identify the most relevant market evidence and understand how the market would likely respond to the subject property.

Market analysis also involves recognising broader influences such as changes in supply and demand, economic conditions, investor sentiment and local market trends where they are relevant to the valuation.

Selecting the Appropriate Valuation Methodology

Once the appropriate valuation methodology has been selected, the valuer applies it using the information gathered during the inspection, market research and analysis. This may involve comparing recent sales, analysing rental evidence, assessing income and expenses, estimating replacement costs or considering other relevant market data, depending on the nature of the property and the purpose of the valuation.

The results are then carefully reviewed alongside all available evidence before the valuer forms an independent opinion of market value. A commercial property valuation is not based on a single calculation or data point, but on the reconciliation of all relevant information using professional judgement.

Reconciling the Evidence and Applying Professional Judgement

One of the most important stages of the valuation process is reconciling all of the available evidence.

By this stage, the valuer has:

• inspected the property
• researched relevant market information
• analysed comparable evidence
• selected the appropriate valuation methodology.

The final task is to consider how all of this information fits together.

Professional judgement is not about making assumptions or relying on instinct. It is the process of carefully weighing the available evidence, assessing its reliability and determining the significance of each factor in arriving at an independent opinion of market value.

Some evidence may carry greater weight than others because it is more recent, more comparable or more representative of current market conditions. Other information may be considered less relevant or require careful interpretation.

The valuer reconciles these various sources of information before reaching a final opinion of value that is logical, well-supported and consistent with the available market evidence.

It is this combination of research, analysis and professional judgement that distinguishes a professional valuation from an estimate based solely on online data or broad market opinion.

Professional judgement is developed through training, experience and a thorough understanding of market behaviour. While the valuation process follows established principles, interpreting the available evidence requires careful analysis to ensure the final opinion of market value is logical, balanced and well supported.

Preparing the Valuation Report

Once the inspection, research and analysis have been completed, the valuer prepares the valuation report.

The report brings together the investigation, market evidence, analysis and professional judgement into a clear, structured document that explains how the opinion of market value has been formed.

Although the format and level of detail vary depending on the purpose of the valuation and the client's requirements, a professional commercial property valuation report will typically include:

• the property's location and identification
• the purpose of the valuation
• the property interest being valued
• the effective valuation date
• a description of the land and improvements
• relevant market evidence
• the valuation methodology adopted
• assumptions, qualifications and limiting conditions
• the valuer's reasoning, analysis and final opinion of market value.

A well-prepared valuation report is more than simply stating a value. It demonstrates the basis upon which that value has been determined, allowing the intended reader to understand the reasoning behind the valuer's conclusions.

Depending on the purpose of the valuation, the report may also include title information, plans, photographs, schedules or other supporting documentation.

Key Takeaways

Frequently Asked Questions

How long does a commercial property valuation usually take?

The timeframe depends on factors such as the property's complexity, the purpose of the valuation, access to relevant information and prevailing market conditions. Simpler properties may be completed relatively quickly, while larger or more specialised properties generally require more extensive investigation and analysis.

Do valuers always inspect the property?

In most circumstances, yes. An on-site inspection enables the valuer to assess characteristics that cannot be fully understood from plans, photographs or publicly available information. However, depending on the agreed scope of work, there may be limited situations where another approach is appropriate.

Why do valuers research comparable sales?

Comparable sales provide evidence of how the market has valued similar properties. Analysing those transactions helps the valuer assess how the subject property compares with current market evidence.

Can two qualified valuers arrive at slightly different opinions of value?

Yes. Valuation is a professional opinion supported by market evidence. While competent valuers applying accepted professional standards would generally be expected to arrive at similar conclusions, there may be reasonable differences in professional judgement depending on the evidence available and how that evidence is interpreted.

Does software determine the value of a property?

No. Technology provides valuers with access to property information, mapping and market data, but it does not replace inspection, analysis or professional judgement. Responsibility for the valuation always rests with the qualified valuer.

Think Like a Valuer

Many people assume that the inspection is the most important part of a valuation.

In reality, the inspection is only one stage of a much broader process.

Professional valuers spend considerable time researching, verifying, analysing and reconciling market evidence before arriving at an independent opinion of market value.

The next time you see a valuation figure, remember that it represents the conclusion of a structured process built on investigation, evidence and professional judgement; not simply an estimate formed during a site visit.

Continue Reading

Now that you understand how a commercial property valuation is conducted, the next logical question is:

How do valuers decide which valuation methodology to use?

In the next guide, we'll explain the principal commercial property valuation methodologies, when each is used and why different commercial properties may require different valuation approaches.

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