A commercial property has passing rent of $180,000 per annum with annual reviews, but market rent is assessed at $220,000 per annum. The lease has 8 years remaining with a quality tenant. How should this rental situation affect the capitalisation approach valuation?
Correct Answer
D) Use term and reversion, valuing the lease term and market reversion separately
The term and reversion method is appropriate when passing rent differs significantly from market rent. This involves capitalising the contracted rent for the lease term, then the market rent for the reversion period, using different capitalisation rates reflecting the different risk profiles.
Why This Is the Correct Answer
When passing rent is below market with years left on the lease, term and reversion values the contracted rent for the remaining term and then the market rent from lease expiry. Each part is valued at a rate that reflects its own risk.
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A commercial property generates annual rental income of $120,000 with operating expenses of $25,000. Using a capitalisation rate of 7.5%, what is the property's value using the capitalisation approach?
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A commercial property valuer is using the capitalisation approach and must determine an appropriate capitalisation rate. Which combination of factors would typically result in a LOWER capitalisation rate?