Is commercial property worth more than residential?
The age-old question of whether a commercial property is worth more than a residential property is a contentious and highly debated issue.
If you are wondering, "how to value my land", there are multiple factors to consider with commercial and residential properties in order to deduce their respective values.
So, when all is said and done, are commercial properties worth more than their residential counterparts?
How is the value of a residential property calculated?
There are multiple methods that can be used to determine the market value of a residential property. An estate agent will look at various factors in connection with the property in order to give you a valuation for estimated worth.
One of the most common ways of determining the value of an individual residential property is to compare it relatively to neighbouring homes, which is known as Inferred Analysis or the Comparative Method.
Using Inferred Analysis, the valuation will be performed by examining the recent sales of homes in the same location. It will specifically focus on homes that have a similar building specification in order to give you an accurate appraisal.
In addition, the valuation will also draw on facts such as the desirability of the location, the size of the property (including the number of bedrooms and bathrooms) and the condition that it is in at the time of sale.
Other important considerations are taken into account, such as amenities, utilities and any regulations surrounding the property, like leasehold or freehold status.
Furthermore, the average time of sale of similar residential properties in the locality will be considered. When properties in the area take longer to sell, this can potentially cause the resale value to lower.
How is the value of a commercial property calculated?
Commercial property valuations share some similarities with residential valuations. However, many of the important characteristics that increase or decrease a commercial property's value are very different from residential homes.
Like residential properties, a commercial property's basic value can be based on a comparison with the resale value of similar properties in the same location. However, the process of commercial valuation involves a number of extra steps.
One of the major instrumental factors used for calculating value is the income capitalisation rate. This method focuses on the amount of net rental revenue that can be generated when the premises are occupied in relation to the estimated cost of the physical building.
For some properties, especially newly built commercial premises, the price of the plot of land in addition to the cost of building materials and construction costs can also be used to calculate an overall value for the building.
What do the different land valuation methods mean for comparable value?
A residential property's worth can be based on physical factors alone. The size and condition of the property and the location of the home are the primary factors that are implicit in the worth of a residential building.
However, while commercial properties are also valued by their physical characteristics, such as location and size, their primary value comes from the amount of revenue they can potentially generate.
Where there is a convergence between residential and commercial properties is in the residential buy-to-let sector. Like commercial properties, part of buy-to-lets' intrinsic value comes from their rental potential.
Is it more profitable to build commercial or residential properties?
It is impossible to conclusively state that either commercial or residential properties are of greater worth or are more profitable than the other. They have different intentions and uses.
Residential property has not only monetary value but often sentimental value too, which can be a unique selling point to families who are looking for a new place to live. The residential home is a place to build memories and enjoy experiences together.
On the other hand, a commercial property is not just about its brick-and-mortar worth. As well as the basic cost of its material, its potential to earn money for the owners is the linchpin of its overall worth.
If commercial premises remain empty for a prolonged time, such as during an extreme downturn in the economy, this can cause the value of the premises to drop significantly.
Residential property values also suffer during a recession but tend to bounce back more quickly. Therefore, while it might be more profitable, there are questions as to whether it is as consistently stable.
If you'd like advice on residential and commercial property development, housebuilding and construction in London and nationwide, contact us today. We can also provide you with a free no-obligation quote if you're looking to sell your land.