What is a commercial building actually worth? For investors in unlisted property, the answer usually comes from a registered valuer, and it goes a long way towards setting what their investment is worth on paper. Here's how valuers arrive at that figure, why it matters and what makes it move. 

What goes into a valuation 

Each property Oyster manages is valued by an independent registered valuer, typically once a year. Their task is to assess market value: the price the property would be expected to achieve between a willing buyer and a willing seller on the valuation date. 

Income sits at the heart of it. Buyers of commercial property are largely buying its rent, so valuers examine that income closely: what each tenant pays, how that compares with current market rents, how long the leases have to run and how secure the income is. 

The building matters too. Location, age and condition all count, as does the spending it will need in the years ahead. A building facing a roof replacement or seismic strengthening will generally be worth less than an otherwise identical one that isn't. 

Then there is the market. Valuers look at what similar properties have recently sold and leased for. Recent leases show whether the property's rent is in line with the market. Recent sales show what buyers are paying, and comparing each sale price with the rent that property earns gives its yield: the annual net income as a percentage of the price. 

Why values move 

Because valuations draw on market evidence, they move with the market. Interest rates, the availability of capital, buyer demand and expectations for rental growth all feed in. That is why a building can be revalued up or down while the same tenants pay the same rent. These factors don't move in step either, so a change in the OCR doesn't translate directly into property values. 

The other influence is what happens at the building, and this is where a manager can make a difference. Signing a strong tenant on a long lease, filling vacant space and investing in the building can all support value. Approaching lease expiries, vacancy and deferred maintenance can reduce it. 

Why valuations matter to investors 

A valuation is more than a figure in an investor update. It affects investors in a number of ways.

• It is the main input into what your investment is worth on paper. 

  
  

• It is used to measure performance. Returns are made up of income and any change in the value of the property, so valuations are needed to show how an investment has performed over time.  

  
  

• It informs buying and selling. When a property is bought or sold, a valuation gives an independent reference point for price. It helps a manager judge whether an offer reflects market value, and lenders typically require one before funding a purchase. 

  
  

• Where borrowing is involved (a very common occurrence in commercial property investment), valuations also determine how much of the property is funded by debt. This is the loan-to-value ratio (LVR): the debt as a percentage of the property's value. Bank loans usually set a maximum LVR. When values rise, the LVR falls and there is more headroom. When values fall, the LVR rises and if it moves above the bank's limit, action may be needed to bring it back within the agreed level. 

  
  

How independent valuations differ from council rating valuations 

A council's rating valuation, including the capital value (CV), is used to set the rates a property owner pays. Rating valuations are updated at least every three years across every property in the council's area, and the market can move significantly in between. Councils themselves recommend an independent valuation when buying or selling a property.  

Reading a valuation 

A valuation is an estimate of market value on a set date, not the price a property will sell for. It also doesn't change the rent tenants pay. 

The fuller picture comes from reading it alongside the income the property earns, how well it is let, the plan for the asset and where the market sits in the cycle. Values will rise and fall with the market over time. For investors with a long-term view, the quality of a property's income and how well it is managed through each stage of the cycle matter as much as any single valuation. 

Disclaimer: The information is general only and not financial advice. It is not intended as regulated financial advice under the Financial Markets Conduct Act 2013 and does not consider your specific circumstances. Oyster does not provide financial advice. Please consult a licensed financial advisor before making investment decisions.