Most occupiers of commercial property will at some point need to work out what the market rent of their property is, either for a rent review or a renewal of their lease.
Adam Schofield, associate in our Reading office, explains the increasingly important role of data in commercial property rents.
It’s easy to work out the rental value on a property when you move in, as it has been on the open market, but what if it has been a few years? How do you go about working out the value of a property, and therefore what rent is achievable or expected?
As with most things in our digital-centric world, data is of course central to this process.
When it comes to working out what your property is worth, we make use of all sorts of data – from information on quoting rents for empty property to achieved rents on lettings, but this is only part of the story.
Assessing the rental value of a property is rarely as simple as using existing data on rents per square foot and applying that information to a floor area.
You wouldn’t pay the same price to buy new Audi A4 as you would for a used Ford Mondeo. On face value, both cars serve the same purpose (getting up to 5 people plus luggage from A to B) and yet the price of one is higher than the other.
The reasons for this include differences in specification/quality and also age. Of course, the same applies to commercial property, only unlike cars ,which are mass produced, most properties are different in one way or another.
Likewise, you wouldn’t expect to pay the same price to lease a car for 5 years with all servicing costs included, as you would to lease a car for 2 years with no servicing costs.
The same applies to commercial property because two otherwise similar properties let on different lease terms can command very different rents after the lease terms are taken into account.
There is also the issue of the relevance of the available data.
Data may tell you what rent someone has actually been paid (called a headline rent), but that serves little more than knowing what the turnover of a company is.
On a commercial property letting there are likely to have been other financial aspects to a lease agreement – the details of which are rarely disclosed publicly.
This includes rent free or discounted rent periods, penalties on break options, landlord‘s or tenant’s works, and more.
Identifying and taking those into account for every aspect of an agreement allows a “net rent” to be calculated.
If knowing a headline rent is like knowing the turnover of a company, then knowing the net rent is like knowing the profit that company makes – and it is more useful than knowing the former, because it reflects the true rental value of a property.
Given the amount of data available these days, why can’t that just be used to work out rental values?
There is, to some extent, too much data out there – an overload of this can prove more harmful than helpful, resulting in ‘useful’ data being hard to find.
Large quantities of data isn’t needed to assess rental value – high quality data is needed.
So, while data is central to the process, experience is also needed to recognise what data is useful and what is not. What data lacks the necessary detail, and what is totally useless.
Rent reviews bring uncertainty in relation to costs/income, and a lease ending brings uncertainty of long-term occupation.
Many landlords and tenants decide to prepare in advance of these events in order to reduce uncertainty.
To this end, both landlords and tenants often talk to a chartered surveyor well in advance of these lease events to obtain an early estimate of the rental value of a property. For tenants, this enables them to budget and accrue, for landlords it enables them to assess their options.
If you have a rent review due in the next 6 months or a lease renewal in the next 12 months, getting advice from a chartered surveyor, preferably expert in the field of lease advice is vital.
It will ensure that you are better prepared for what rent you will either be receiving as a landlord, or paying as a tenant, and will save you money in the long term.
When your lease event happens, you will also have the expertise of your surveyor readily available to interpret and use property data to value property, to undertake the necessary negotiations to secure the rental deal you want.
In an increasingly digitised world, where Big Data reigns supreme, it’s important to make the most of the benefits it can reap. But data is only as good as it is accurate. Having a chartered surveyor on board to interpret it and translate it into negotiable terms is still vital.