Always do your research before purchasing a property!
Where quick analysis is required and you wish to move fast, such as bidding on a property at auction, a matchbox valuation (also known as back of the envelope valuation and high-level valuation) is a common term to describe how property professionals estimate the value of land, vacant buildings, tenanted investments and childcare centres.
In describing a property’s value, a yield or capitalisation rate is used alongside a dollar value, or dollars per square metre ($/m²). The following is a simplistic guide on a matchbox valuation for any property.
Land Value
This is estimated by multiplying the land area with the average square metre rate of land sales for properties with the same zoning. This is critical, as different zoning will allow for different development potential. Make an adjustment if the site is road frontage or a rear site. If there is a building on-site, deduct estimated demolitions costs. Deduct value for the area of right of ways, costs of connecting services, site works, geo-tech and potential site contamination. Certain easements on the title may restrict where you can build.
Vacant Buildings
Multiply the component parts of the building: offices, amenities, warehouse, and car parks by the comparable rental rates for similar buildings. Add the total potential rental figure up and then divide by a market yield for a tenanted property. Add to the value any surplus land that could be utilised in the future (for yard, car parks and building expansion). Make further adjustments for location, road frontage, age of building and %NBS rating. Deduct an amount for a vacancy period, tenancy incentives and letting costs.
Tenanted Investments
Estimating value is generally more straightforward. Divide the annual rental by an average yield for properties of a similar nature. If the lease term is short, rental rates above market, or tenancy at risk, then a higher yield is applied. Adjustment for any unrecovered outgoings and costs such as maintenance and seismic upgrade can be deducted from the value. Be mindful that higher rentals on buildings may have involved landlord incentives.
Childcare Centres
The annual rental is estimated on a child per week basis. For example, 50 children at $45 per week per child per annum (50 x $45 x 52) provide an annual rental of $117,000 p.a. A yield is then applied to give an estimated value as with tenanted investments. Check if the weekly rental per child is at a fair market rate compared to other centres.
Conclusion
The above is a simplistic general guide and different properties have different values to developers, owner-occupiers and investors. More recently buildings occupied by tenants who can trade during a COVID-19 Lockdown are more keenly sort after.
If in doubt about a property’s worth, make sure you consult a real estate professional. We always recommend purchasers research a property thoroughly and seek professional advice from a lawyer, accountant, valuer, engineer, building inspector prior to purchasing.
Make your final judgement by trusting your research and your gut instinct. If you miss out on a property, do not be too disappointed. You still have your cash ready for another day. Cash, as they say, has a 10% premium.
