Market Rent Valuations
Sovereign Valuations is experienced in undertaking market rent valuations and determinations with experience across all major property classes. When undertaking a market rent valuation, it is important to have an understanding of both the terms of the lease and any relevant legislation governing the lease, which in many instances includes the provisions of the Retail Leases Act 2003 in Victoria and the Retail Leases Act 1994 in New South Wales. The terms of the lease including incentives, outgoings, review formulas and permitted use are some of the many elements to be considered when assessing the market rent.
‘Market rent’ is defined by the International Valuation Standards Council (IVSC) as “the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
The accurate measurement of area is a critical step in assessing a market rent, noting that different property classes have different measurement methods, which can have a significant impact on the market rent. The Australian Property Institute recommends the measurement of area in accordance with Method of Measurement published by the Property Council of Australia and International Property Measurement Standards published by the International Property Measurement Standards Coalition. It is important for the Valuer to consider which measurement convention and metric is adopted by the market being assessed, as consistency across rental evidence and the subject property is an important step towards an accurate market rent valuation.
The majority of non-complex commercial holdings are valued on a direct comparison basis with the analysis of a market rate per square metre, however ‘trade related property’ such as hotels, nightclubs, service stations and theatres can be valued using the profits method (also known as the income approach). A trade related property is defined within RICS Valuation - Global Standards as “any type of real property designed for a specific type of business where the property value reflects the trading potential of that business”. When undertaking the profits method it is important to note that both the Retail Leases Act 2003 in Victoria and the Retail Leases Act 1994 in New South Wales both specifically state that the goodwill of the tenant is to be excluded in the valuation of market rent. Additional profit of a tenant over and beyond the expectations of the market can be attributable to personal goodwill and as such should be excluded in a market rent valuation should an above Act apply.
Obtaining quality advice within this specialised field of valuations is imperative to ensuring a satisfactory outcome for both the lessor and lessee.