Rental Valuations Archives

How a commercial rent review can help you negotiate with your landlord

Posted on May 23, 2019 by dev@perryhill

If you lease a commercial property, you’ll know that some landlords may inflate a property’s rental value and charge more than the property is really worth. But did you know that there’s a formal way to challenge the landlord’s proposed rent and ensure you’re paying a fair market rent? That formal process is known as a ‘rent review’.

How do rent reviews work?

A rent review can be used for any type of land or commercial building, and is recommended anytime you renew a lease or take on a new lease. In a nutshell, you appoint a chartered surveyor to assess the property in line with professional valuation standards and current market conditions to gain an accurate picture of its rental market value. You’ll then receive detailed information about the value of the lease, which you can use in negotiations.

It’s not just tenants that can request a rent review – landlords may also appoint a surveyor to conduct a rent review. Say, for example, a landlord feels their property is undervalued at present, they may want a rent review to justify a higher rental value when the lease is up for renewal.

Typically, commercial rent reviews are carried out every three to five years, but your lease agreement may outline more frequent reviews. Be certain you know what you’re agreeing to before you sign on the dotted line.

Making sure you’re paying a fair rent

When you understand a property’s correct rental value, it puts you in a stronger negotiating position:

You can be sure you’re not overpaying, before you agree to a new lease or lease renewal.
In the event of a dispute with your landlord, you can use the rent review as proof of the property’s current market value.
You can set out any factors that may lower the property’s market value, such as maintenance issues or external influences – and these factors will be supported by the rent review.
You can also budget accurately, and keep your operational costs to a minimum.

At Perry Hill Chartered Surveyors, we act as commercial rent review surveyors for tenants or landlords who need a rent valuation they can trust. Our experienced surveyors are certified by RICS, the Royal Institution of Chartered Surveyors, meaning you will always receive an accurate, fair rent review. Discover more about our commercial rent review service.

Landlords, when did you last do a rent review on your commercial properties?

Posted on May 9, 2019 by dev@perryhill

In our experience, many commercial landlords forget about doing a regular rent review. It’s an easy thing to overlook – particularly when a property is being leased to a stable, long-term tenant – but neglecting the rent review can cost you money in the long term.

What’s involved in a commercial rent review?

In simple terms, a chartered surveyor will assess your property, compare it to other similar commercial properties in the same area, and provide a report on the property’s current rental market value. The rent review can then be used to ensure the rent is set at the proper market rate, and to support lease negotiations.

How often you conduct a rent review will depend on what’s set out in your commercial lease agreement, but every three to five years is a good rule of thumb. Certainly any time a lease is due for renewal, you should carry out a rent review before negotiating the new lease with tenants.

Understanding the benefits of regular rent reviews

A rent review will help you establish the correct market rental value of your property, which means:

You’ll be able to increase the rent every three to five years, depending on inflation and market conditions.
You’ll have the assurance you need to tackle lease renewal negotiations with confidence.
You’ll be enhancing the value of your property and protecting your investment.
In the event of a dispute with your tenants, you’ll have proof of the accurate value of the property.

Professional standards for rent reviews

Whenever you’re negotiating a lease with tenants, both you and your tenants will have different objectives in mind; you’ll obviously want to maximise your investment, while the tenant (rightly) wants to make sure they’re not paying over the odds. A professional rent review – one that’s conducted in line with international valuation standards – ensures that the rent is fair and accurate, thus paving the way for smooth, successful negotiations.

At Perry Hill, our team of RICS-qualified chartered surveyors has a wealth of experience helping landlords with all aspects of commercial rent reviews and valuation – including for pension funds, trusts, charities and local authorities. Serving Surrey and the South East, our trusted rent review service can be used for any type of land or commercial building. Ask us about enhancing the value of your asset with a commercial rent review.

Lease Valuation Methods and Examples

Posted on February 14, 2019 by dev@perryhill

The market for acquiring short lease flats has always been strong, with investors and developers seeking to acquire short leaseholds, to refurbish and to obtain a lease extension. In this blog we look at the methods of valuing a short lease, in respect of obtaining a statutory lease extension.

Lease Valuation Method for Properties

The main accepted method of calculating the existing Leasehold value of a particular property, with less than 80 years unexpired lease term, is to utilise the Graphs of Relativity. However, this is not always appropriate valuing short leases, when they get to sub 30 years.

In cases where a lease term is sub 30 years unexpired, other methods of valuations should be considered. Using an investment calculation would be appropriate in ascertaining an existing lease value in our opinion.

There would be no need for any further allowance for the “no act” world which you would have to consider when using a graph of relativity to calculate the existing Lease value. The statutory assumption to be adopted when valuing the existing lease value is to assume that the property does not have any rights under the act for a statutory lease extension.

For unexpired Lease – “short leases” of say 20/30 years unexpired threshold, the valuation method should consider what a prudent investor be willing to pay to acquire the Lease taking into account that at the end of the term the Leasehold property would revert back to the Freeholder. A valuer would first have to access how much the property would be let out for on the open market, per annum, minus the relevant deductions associated with properties that are let out on an Assured Shorthold Tenancy. Once this has been assessed an appropriate yield would need to be applied. The yield would represent the appropriate rate of return an investor could expect from a property, knowing that it is effectively a wasting asset.

Leasehold Valuation Calculation

We have outlined a leasehold valuation calculation example below; please note the figures used are purely subjective.

A two-bedroom, ground floor flat rents for £1350.00 per calendar month (£16,200 per annum). Unexpired term is 17 years.

Calculation

£16,200 per annum

Less

Ground rent @ £15.00 per annum

Management costs @ 10% of annual rent (£1620.00)

Void period @ 5% of annual rent (£810.00)

Total = £13,755 per annum

Capital Value

£13,755 @ Yield (8%) for 17 years (9.1216 YP) = £125,468.00

Typically, a residential investment would attract a yield of 3-5%, given the inherent capital value associated with residential investments. However, as this asset has a declining value because it is a leasehold wasting asset, an investor may expect a return of 7-8% on sums invested reflecting the capitalised short lease value.

This is an appropriate method of valuation for residential short Leases, as the methodology represents a tried and tested approach for calculating the value of investments across a multitude of different disciplines. The Upper Tribunal has stated that the Graphs of Relativity should only be used when there is a lack of real-world evidence. This method would be considered as real-world evidence, as it is based upon transactions that have been completed. There may be different attitudes to yield and deductions applied to the calculation depending on the location, lease and type of the property.

Lease Valuation Advice from Perry Hill

Our valuers are specialists in appraising Leases and Leasehold premises, in order to provide Clients with realistic assessments, in respect of the premium payable in lieu of Statutory Lease Extensions.

Get in touch with one of our team members today by filling out our contact form. One of our trusty agents will then get back to you.