Commercial Valuations: Why the Numbers Work Differently
Residential property is valued on comparables. Commercial property is valued on yield — the relationship between passing rent and the market's required return. Understanding this distinction unlocks a completely different approach to value creation.
A commercial property generating £50,000/year rent, in a market where investors accept a 7% yield, is valued at approximately £714,000 (£50,000 / 0.07). Increasing the rent to £60,000 — perhaps by refurbishing, extending the lease, or adding a break clause — increases the value to £857,000 without changing the building at all. This 'forced appreciation through income' is how experienced commercial investors create value independently of the general market. Conversely, a vacant commercial property with no passing rent is valued on bricks-and-mortar cost alone, often significantly lower. Understanding yield-based valuation is fundamental to commercial property investment.