A residential valuer looks at what similar houses sold for. A commercial valuer looks at what income the building produces and how secure that income is. That difference explains most of the surprises business owners encounter when buying premises.
The main approaches
Investment method. Used where the property is let. The valuer takes the rental income and applies a yield — effectively a multiple — reflecting how secure and how attractive that income is. A strong tenant on a long lease produces a higher value than the same building let to a weak tenant on a short one.
Comparable method. Used for owner-occupied and standard units, and closest to residential practice. What have similar units in the area sold for.
Vacant possession value. What the building would fetch empty. Lenders care about this because it is what they could realistically recover if they had to sell. On a let property this figure can be considerably below the investment value.
Profits method. Used for trade-related property — pubs, care homes, nurseries, petrol stations — where the value is bound up with the business operating from it.
Lenders often work to the lower of investment value and vacant possession value. That single convention causes more unexpected shortfalls than anything else in commercial lending.
Why the tenant matters as much as the building
For an investment purchase, the covenant — the financial strength of the tenant — is central.
A unit let to a large, well-capitalised company on a fifteen-year lease with no break clause is a fundamentally different asset from an identical unit let to a two-year-old business on a three-year lease. Same bricks, very different value.
Valuers will look at:
- Who the tenant is and their financial standing
- How long the lease runs and whether there are break clauses
- Whether the rent is at, above or below market level
- Any rent-free periods or incentives granted
- Repairing obligations — who pays for the roof
If you are buying tenanted property, get the full lease documentation early. It drives the valuation more than the building's condition does.
What can reduce a commercial valuation
Specialist or single-use buildings. A building designed for one purpose is harder to re-let. Valuers and lenders both discount for it.
Location. Secondary industrial or retail locations attract higher yields — which means lower values — because the risk of a void is greater.
Condition and compliance. Asbestos, dated electrics, poor energy performance, or structural work needed. Commercial buildings must meet minimum energy efficiency standards to be let, and a poor rating can affect both value and lettability.
Short lease or awkward title. Leasehold commercial property with limited term remaining, or restrictive covenants, both weigh on value.
Environmental issues. Former industrial use can bring contamination concerns. Lenders take these seriously and may require investigation.
Practical points
It costs more and takes longer. A commercial valuation is substantially more expensive than a residential one, paid up front, and typically takes two to four weeks. Budget for both.
You may not see the full report. The valuation is instructed by the lender for the lender. You usually receive the headline figure rather than the full document, though some lenders will release it.
Down valuations are more common than in residential. Because the methodology depends on assumptions about rent, yield and re-lettability, there is more room for a valuer to disagree with a purchase price. If the valuation comes in low, the loan reduces and your deposit must increase.
Challenging one is possible but harder. With residential you can supply comparable sales. With commercial you are arguing about yield assumptions and covenant strength, which is a professional judgement. A challenge is more likely to succeed with genuine evidence — recent comparable lettings, or information about the tenant the valuer did not have.
Reduce the risk before you offer
Get the lease pack early on a tenanted purchase.
Ask a local commercial agent what the unit would let for and what similar ones have sold for. An independent view before you offer is worth the conversation.
Be realistic about specialist buildings. If the property only suits one type of occupier, expect a cautious valuation and a larger deposit requirement.
Tell us the property type at the outset. Which lender we approach depends heavily on it, and some lenders simply will not consider certain categories.
Call 0116 277 7536 or see commercial mortgages in Leicester.
More guides: commercial finance guides for Leicester.
