Commercial Yield Valuations
Commercial properties are valued based on their rental yield using the investment method of valuation, rather than purely relying on bricks-and-mortar comparables.
When valuing standard residential homes, surveyors use the 'comparable method', looking at what similar houses on the street recently sold for. Commercial property and large HMOs are valued very differently.
They use the Investment Method of Valuation. The value is intrinsically linked to the income the building produces. The surveyor determines the Net Operating Income (annual rent minus operating expenses) and divides it by an appropriate capitalisation rate (yield) for that area and asset class.
Forcing Appreciation
This is highly advantageous for investors. If you buy an underperforming commercial asset and negotiate a new lease that increases the annual rent by £10,000, and local yields are 10%, you have just mathematically forced the capital value of the building up by £100,000, regardless of what the bricks and mortar cost.