Image of RICS logo.

Commercial valuations

Image of the interior of industrial unit.

NOTE: This page is for general information - Marshalls do not undertake commercial valuation work.

You may need to value your business property for any number of reasons: security on a loan, buying or selling a property, for inclusion in accounts or in a prospectus of for insurance purposes. Valuation is a complex business and there is no such thing as a single valuation for a property, useful for all purposes. Valuations are produced on different assumptions - and may come up with different answers, depending on their end use. Your chartered surveyor will recommend and carry out the best valuation for you. But only after you have explained very clearly what you want the valuation for.

The valuations undertaken by Chartered Surveyors are regulated by RICS Valuation – Global Standards 2017 - usually known as the Red Book. Before doing the valuation, the valuer will liaise with you to establish its purpose and anything else you need. This helps you understand what to expect and also makes sure the valuer provides the right advice. Frequently, valuations are required on various alternative assumptions. The valuer might be asked to assess the value once certain improvements have been completed, or to establish the effect of a change in the occupation of the property. To avoid scope for misunderstanding, any assumptions of this kind must be clearly agreed between valuer and client at the outset. In the interests of consistency.
The Red Book also contains rules on the bases of valuation and on the way in which valuations are reported. For most valuations the chartered surveyor is bound to stick to the Red Book rules. Where there is a possibility that the valuation may be relied on by a third party, these rules are particularly strict. However, there are exceptions where valuation advice may be given outside Red Book rules. An example is if you require informal advice when you are thinking of selling a property. A valuer may also depart from Red Book rules in exceptional circumstances, though this must be stated in the report.

1. The most common basis of valuation is market value (MV) - the estimate of the sale price if the property was sold at the date of valuation. MV, or open market value as it used to be called, is an internationally recognised valuation basis. Where an alternative use of the property is possible, say for redevelopment, this would be reflected in MV if it produced a higher figure than the one for the existing use (depending, of course, on getting relevant permission and the time of redevelopment). Where either the buyer or seller was (or might come) under pressure to complete the transaction, advice on the MV alone might not be adequate. The valuer will need to look at the effect of the special circumstances on the price achievable, and how this differs from MV. This might happen if a buyer had a special interest in getting the property for redevelopment or to expand their existing property for example.

2. Where a value is needed for a company's accounts, or to be included in any other form of financial statement, special rules apply. Except for specialised property, all owner occupied property should be valued on the basis of existing use value (EUV). Similar to market value, EUV actually reflects the costs the owner would need to pay for acquiring the property for the existing use in the market place. But it ignores any higher value that could come from an alternative use. However, investment or surplus properties are normally valued at MV, even in financial statements.

3. You may need a valuation for tax purposes. The valuation basis largely depends on the regulations covering the specific building. Although these bases are usually similar to MV, there are important distinctions. Specialist properties in which there is no real open market (like a power plant, say) are normally valued on a depreciated replacement cost (DRC) basis. Land is valued on an existing use basis. The buildings on that land are valued at what they would cost to replace, with a deduction for age or non-use. The two figures are then added together to provide the value.

4. Finally, how do you get a figure for insurance purposes? Since the insurer is interested in the cost of replacing the buildings, not in the value of the land that they stand on, you would need a 'reinstatement cost assessment'. As such, it is not one of the Red Book valuation bases, though your chartered surveyor can supply it.

5. You may also want a valuation for example as evidence in legal proceedings or as part of an appraisal of the viability of a development. These also differ from those in the Red Book.

There is quite a lot, and the Red Book sets out the items on which information will be needed (the 'conditions of engagement') before the valuer can report. Many of these are obvious. What is being valued (are plant and fixtures to be included)? What is the purpose of the valuation? What leases, if any, are involved? Your chartered surveyor will be able to guide you through this process.

A valuation is not a building survey. The valuer looks at the general condition of the building, but will not do a detailed search for defects. Nor will a valuation normally spot possible environmental problems, unless you have specifically asked for the valuation to reflect a land quality statement or other environmental advice.

No. A valuation is produced for a specific client, a specific purpose and is based on specific assumptions. To use it in a different context could be misleading. You will need to agree with your valuer from the beginning why you want the report.

It all depends on what is being valued so you need to discuss this with your chartered surveyor at the start. As part of their codes of conduct chartered surveyors must give you a written note of their fees before the valuation. But do remember that there is an inevitable element of opinion in any property valuation.

Protect your business with the right insurance for your premises. Remember, buildings insurance does not usually cover disruption to your business, contents or stock that will probably need to be insured separately. And if you are a tenant, your lease probably needs it. A chartered surveyor can calculate the reinstatement cost for insurance purposes, advise you on precautions that will satisfy your insurer and negotiate on your behalf if you are unlucky enough to suffer a loss.

If you are a tenant, establish who is responsible for insuring the premises. You may have to both arrange and pay for the building insurance. On the other hand your landlord might arrange insurance but pass the cost on to you. If you occupy only part of a building, the landlord will probably arrange insurance for the building as a whole and charge you your proportion of the cost. Normally you go through your own insurance broker but do get at least three quotes. Once you have made a choice, get a copy of the policy document and ask your broker to advise you on its details. Your insurers may want to see the reinstatement cost assessment that your chartered surveyor has produced, and might also want to carry out their own inspection of the premises. Your landlord may also want to see evidence you have adequate insurance with a reputable company.

Your chartered surveyor can do a reinstatement cost assessment. This tells you what it would cost to rebuild the premises if they were to become a total loss, including the cost of demolition and clearing the site plus professional and local authority fees. However, make allowance for inflation in construction costs. In an industrial building, any process plant would normally be insured under a separate policy. Make sure your insurance provides cover for disturbance and relocation costs in case your premises become unusable following serious damage. Also have insurance cover for continuing to pay rent in the event that the building is damaged and you are unable to run your business from it.

Your insurance policy will probably have an 'indexation clause'. This automatically increases the sum insured in line with construction costs each year. However, you need to review the figures whenever you make alterations. In any case get your chartered surveyor to review the reinstatement cost every three to five years.

If your premises are seriously damaged by fire, for example, the fist task will be to carry out emergency work to protect the building and its contents. Contact your chartered surveyor immediately and they will be able to negotiate with your insurers or their loss adjusters over the emergency measures and administer the work. Later, your chartered surveyor will be able to negotiate the full claim on your behalf. Your lease may say you no longer pay rent if the premises are no longer usable. Finding alternative space will be your own responsibility. If you were responsible for insuring the property, it will normally be up to you to arrange to have it repaired or rebuilt. Again, your chartered surveyor can help with the planning and may act as contract administrator for the construction work