Most people are daunted by the prospect of commercial rent calculation as commercial leasing has so many variables to begin with!
But average rent will fluctuate with commercial rental properties based on a range of factors, all which we’ll discuss in detail. In this article, you will also learn how average rent is calculated for a commercial rental property.
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Average Rental Value of a Commercial Property in Australia
The rental value of commercial properties in Australia have been on the rise for the last two years. According to reports, the real estate market yield in New South Wales was recorded at 4.5 percent in the third quarter of 2022.
Commercial landlords in NSW have contributed to about 45 percent of the real estate transaction in Australia until now. Another 1.5 percent of transaction activities have occurred in the Western Australian commercial real estate market according to another report.
As of today, the average net face rent for properties in the central business district amounts to $1,323 AUD per square metre. If you’re looking to invest in commercial properties, the best way to understand rental value is by talking to a real estate expert.
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What Impacts Average Rent of Commercial Space?
Investors looking to make money in commercial real estate have to be careful about the type of asset they’re buying. Not every type of commercial property will provide the same yield or return, as certain factors come into play.
Cap rate and gross yield
Gross yield defines the rate of return on a property in the form of rental yield as a proportion of its sales price. Capital rate is the same quantity, but it includes overheads like land taxes, cost of maintenance, and more.
Both markers give you an estimate on a property’s returns during the period of ownership but this quantity does not take into account any profits or losses generated by a rise or fall in the property’s capital value.
Type of property purchased
Different businesses incorporate commercial leases based on the type of property they’re withholding at that point. A commercial tenant pays rent for a retail space based on the total square footage of an area, where infrastructure plays a key role:
- Office cubicles
- Shopping malls
- Restaurant stalls
Occupancy rate and tenant demand
Rental yields are high or low based on tenant demands. As tenant demand goes up, so will the monthly rent value of houses and buildings in a specific area.
For instance, a newly constructed office complex will invite both small and large-scale companies, as it has a higher vacancy rate. As a result, the real estate price will rise as their demand increases in the market.
Other factors that impact rental value are age and condition of the property, including access to certain facilities like closest transportation hubs.
Terms of the commercial lease
Commercial leases are subject to rental increments on agreed terms, wherein the tenant pays a fixed amount to the landlord, contributing to the operating and maintenance expenses for the building or land. Commercial leases can last anywhere between 3 to 25 years, often including options for the tenant to renew the lease.
Conditions on the lease
For instance, when the property owner is entitled to a certain percentage of the tenant’s business profits. This holds true for locations that receive a lot of foot traffic. It presents an opportunity for small business owners to grow more revenue.
Property owners receive a base rent for accommodating commercial real estate and additional income for allowing tenants to utilise prime locations. To calculate percentage rental rate, you can try one of the following methods:
- Percentage over a base profit amount: In this method, the owners devise a rental plan that adds a percentage of total profit and base rent, when the tenant makes more than the predetermined revenue.
- Percentage over gross profit amount: In this method, the owner specifies the base rent and an additional percentage of gross profit, regardless of the revenue model that works independently on the side.
Calculate Rental Value of a Commercial Property
Income capitalisation
Calculate rental yield by dividing the annual income on a property, by its sales price. Using this method, you’d estimate an annual income minus expenses around the property maintenance, and compare this with similar properties in your location. For example, a manufacturing warehouse bought at $6 million with an annual income of $300,000 has the potential to yield 5% returns.
Comparable sales method
This method is a comparative analysis of recently sold properties similar to yours, in the same location, with access to similar facilities.
You would need to find at least three comparable properties, combine the price per square metre of comparable properties and then apply this to your own.
Average price per square metre x property size = property value
This method gives a good idea of what commercial properties are worth in a specific area, but it isn’t the most reliable method of evaluation.
Summation method
The summation method is the simplest way to estimate commercial property rent as it determines an overall value. Start by adding the total cost of the land, cost of construction or repair jobs, and even landscaping to this expense.
Additionally, consider the cost of improvements, such as establishing an office space or fencing a warehouse. Valuation using the summation method also includes other factors like strata scheme, energy efficiency, property size and condition.
Hypothetical development method
Best for evaluating land that is up for development, particularly when you’re dividing the land into plots. You calculate the value of the land based on the maximum number of dwellings it can fit. Then, the development costs are evaluated from the value of the dwellings, indicating the development’s rate of financial success. For an accurate representation, you’ll need expert guidance on rising costs and property price projections.
Key Takeaways
- Calculating average rent for commercial space involves considering various factors like cap rate, gross yield, type of property, occupancy rate, tenant demand, and lease terms.
- Different methods for calculating rental value include income capitalization, comparable sales, summation, and hypothetical development methods, each suited for different situations.
- Understanding these factors and methods can help in accurately estimating the rent and ensuring a profitable investment in commercial real estate.
Calculate Fair Rental Value of a Commercial Space
One of the best ways to identify investment opportunities for commercial renting, you should always consider different evaluation methods.
Leah Jay deals with commercial property management and procurement for small to large-scale businesses and companies in Australia. We can help you figure out which rental evaluation method best fits your business needs.
Our expert team has experience with the commercial real estate landscape and would be happy to assist you by answering all your queries. We can also provide you with a comparative market analysis report to simplify your investment experience. For commercial property management services, call us today.
