While buying a commercial property there is usually confusion as to what is the market value or pricing of a commercial property. To find a match between the buyer’s expectations and the seller expectations is a tough job to do, when it comes to pricing. This write up should help you come to a logical price point while negotiating for the final price by calculating the tentative pricing of commercial property.
Concept of yield for commercial property
Yield is defined as the rental income generated from a property divided by the capital value of the property. In the Indian scenario, the yield of a commercial property would range from 6.5% to 8.5%-9%, depending upon the kind of tenant. For example, a bank would be a safer occupant and hence yield for this kind of tenant would be comparatively lesser.
Point to know here is that the rental yield would be more than a banking fixed deposit as the cash flows are monthly in the form of an annuity.
Steps to calculate the fair pricing of a commercial property:
- Check out the existing rentals in the property and its neighborhood: This can be done by secondary research from sources like magicbricks, 99acres and research reports from International Property Consultants (IPC) like Knight Frank, JLL, Cushman & Wakefield and CBRE for existing rental in micro markets. Primary research can be done by asking landlords for existing rentals.
- Converting monthly rental to annual incomes: This is to be done by multiplying the monthly rental into 12. While doing so, the maintenance charges are not to be added in the rentals as that ispaid by the tenant.
- Arriving at the capital values: Capital value of an asset is the price one pays to procure the asset, in context to a property the it would be the all-inclusive price. The annual income calculated in step 2, above is to be divided by the yield that is between 6.5% to 8-8.5%, to arrive at the fair market value of the property. The table below would make this concept clearer
| A | Monthly rental [Rs./Sq. Ft.] | 50 | |||
| B | Annual Income (AX12)-[Rs./Sq. Ft.] | 600 | 600 | 600 | 600 |
| C | Yield (6%-9%) | 6.50% | 7% | 8% | 8.50% |
| D | Capital Value (B/C)-[Rs./Sq. Ft.] | 9230.77 | 8571.43 | 7500.00 | 7058.82 |
Conclusion:
The process mentioned above, is for simple calculations that would help one to be armed with data while negotiating for the final price of an asset, by calculating an estimated pricing for a commercial property.
However, there is more to it, like arriving at annual incomes by taking an average rental income, on account the fact that cash flows are never-ending, would command an increase after fixed tenures, and the methodology is similar to calculation the value of a company via discounted cash flow method. It is for these reason that the yield of 6.0% to 9% should not be looked at as a parallel to bank rates, as it would not be an apple to apple comparison. Armed with this knowledge you can now negotiate better while you are looking to buy your next commercial property. Happy buying!
Also read Commercial Property Investment in Noida, Upcoming and Existing Options
