How do I value my shop?

Introduction from a Surveyor

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How much is my shop worth?

We have been asked over the years to value shops and constantly find that where a shop has been valued by the present owner it is typically over valued and where it has been valued by a prospective purchaser it is constantly being undervalued! As Surveyors we have been valuing shops for many, many years and this scenario works both in boom times when the property market is hot and moving quickly and also in recession times when next to nothing is selling. The owners that we deal with, we often find, seem to be obvious in our experience, to the market conditions and always over value their property and equally the purchasers generally under the value the property although many are willing to take the seller's word for regarding the price.

Cash transactions

A part of the market seems that seems to have been forgotten is cash transactions of those transactions that do not stand up to mortgage company checks. We believe that a large number of transactions take this form in the smaller retail shop market. Equally in this market the zoning we talk about, in terms of Zone A, we do not feel is applicable please see more about zoning in a later section of this article.

Property Problems

We also find that owners and purchasers sometimes seem to be oblivious to property repairs and property problems which can have major cost implications. We have recently been dealing with a property where experienced property purchasers have bought without a survey, they tell us that they always do this, and we have discovered major problems that have affected the value considerably. If you are dealing in property you need to be careful that because you have been lucky in the past does not mean that you will be lucky in the future.

We are of course Independent Surveyors so we would always recommend a survey is carried out but nevertheless when dealing with such large transactions you do need to take expert advice and be safe rather than sorry.

Things to consider when looking at the value of a property

If the property is freehold you need to look how the building divides up and what elements make up the property. For example of course will be the shop element, most of which are on ground floors known as the trading area and this then will usually have a store and some facilities such as toilets and wash up area together with possibly a staff area or loading area. Often shops have additional space which they do not use on the first and second floor which may have been converted into more storage or may be used for flats or in some cases we have come across offices. These areas may or may not have their own entrance which again will affect the value of the flats.

Put it all together to get the value of the property

All the various elements that make up the property; the shop, the flats or offices together with where the property is located, will when added up make the property's value.

Location, Location, Location

It is so important where your shop is located as this affects value. This is mainly because shops in primary locations attract top end purchasers such as national chains, specialist premium shops and investors etc.

Primary shop locations

A primary location such as a High Street rarely has many empty properties even in the bad/recession times and at the very least the location will attract charity shops or equivalent.

We have used the term primary here to look at the High Street location although you can also have out of town primary shopping areas and of course High Streets that are not primary areas particularly if there is a major town nearby.

Secondary shop locations

The simple way to describe secondary locations is that they are those areas away from the main High Street that tend to attract some national brands as well as having a mix of local businesses or estate agents, funeral directors, dentists, cafés, coffee shops, fish and chip shops, kebab houses and other food offerings. Although equally some of the top end brands will exist only in the High Street locations and some of them will exist only in the tertiary locations.

Tertiary shop locations

Tertiary locations tend to be away from the main shopping areas, on the outskirts of towns or within estates on neighbourhood parades, these may occasionally be described as destination shops where there are specialist outlets that people travel to find them for example a school uniform shop or specialist sports shop.

The main question we always feel should be asked is; is the tertiary area alive and developing or is it dying? An area with dying shops has shops which are boarded up or closed and may even have had some of the shops converted to houses or flats. Nevertheless a very good living can be made in these areas if you are the only shop left for example a specialist shop.

Shops and Footfall

What on earth is footfall? We, and others, use this term to mean a range of things however we think truly footfall could be argued by the shop trader as being the foot traffic that passes the shop that has a reasonable chance of wanting to come into the shop for business. Shops and general stores on the route to a school for example are a good footfall with bookmakers in the same location not being as attractive.

How do I value my shop when it has flats or offices above it or development potential?

There are many different ways to value properties, here we give a basic example but there are many, many variations to it, we almost did not include this section but we feel that some general help and guidance is needed in this area.

Different standards of flats give different values

Firstly let us concentrate on the flat example only as there are many sorts of flats over shops ranging from older style flats to ones that have been modernised and ones that are newly constructed flats. This is the first thing that will make a difference in value.

What is beneath the flat gives a different value

Also there are flats that are more desirable and less desirable than others due to the shops that are beneath them.

For example would you prefer to live above a fast food outlet or above a book shop?

A flat with its own entrance gives a different value

Equally a flat with its own entrance away from the shopping parade and the shop front we feel gets a better value; this value on the flat can range from ten percent to thirty percent less than market value depending on a number of factors.

What is open market value and what are comparables?

Open market value or market value or OMV or MV as it is also known relates to what a property would typically sell for to a typical buyer/average person. This figure is chosen by the surveyor based upon his knowledge and experience of that type of property together with what is known as comparable evidence that the Chartered Surveyor finds for properties that have been sold.

Comparables are as simple as playing snap?

On one level valuation is as simple as playing snap where you simply have to match up the building you are looking at with other ones that are similar that have sold. However all buildings are different although on another level it is a bit like a set of scales where you have to balance up the features of the property (the plus points and the minus points) to make a value.

Surveyors are just opinions

At the end of the day the Surveyors valuation is just an opinion however it is an opinion based upon many years of experience and is an opinion that is far more valid than the average man in the street that does not have regular contact with property transactions and the market.

Valuing the shop

Shops are valued in several different ways which will depend upon many different factors. We do like to value on comparable properties, which is easier said than done, as the information and evidence for commercial property sales is not as transparent as that for residential sales and it is harder to find unless you know the market.

In terms of Zone A is it applicable for all shops?

There are also many arguments regarding shops that you should be carrying out zone calculations abbreviated to ITZA which means In Term of Zone A; there is also Zone B, Zone C etc. The zones relate to the width of the shop front; for example Zone A is the first part of the shop front and it is argued that a large shop front will attract more customers than a small shop front. Whilst this may be true in primary and secondary locations in some primary and secondary locations it is worth comparing other similar businesses and the rents that they pay and make an adjustment based upon the size of the property.

Just to explain a bit more about the ITZA, or the Zones as it's also called. Zoning is a way of measuring retail premises. It works on the basis of Zone A which is nearest the windows, the window being the first 6.1 metres, which was originally 20 feet. The next section Zone B being the next 6.1 metres and Zone C being the next 6.1 metres and then there is what's termed as The Remainder, which is anything after Zone C.

We then look at evidence of actual rents being paid and take into account the size and shape of the shop and you end up with a price per square metre for each Zone.

Then do what's known as halving back, which is generally where each Zone is worth half as much as the previous Zone.

Just to explain a bit more about Zoning

Zone A is considered the most important zone as that's where the window is and where customers initially walk into. We have heard people say that the middle of the shop is where they have most stock, however people have to be inside your shop to actually see it.

Zone C which is the furthest back and the Remainder Zone, which is all 18.3 metres from the doorway is a fair distance to talk into a shop.

Is it fair to value my small shop using this method?

We would say the answer is probably not, however we do think it's a good way of standardising values and whilst we are well aware that a smaller shop owner tends to think of how much rent they pay per week or per month in relation to how much money they make, this does tend to relate back to the metre squared zoning figure.

How do we measure?

We don't measure to the outside walls, we measure to the inside walls and use Net Internal Area (NIA) and exclude certain areas:

1.  Service accommodation, i.e. toilets

2.  Associated lobbies

3.  Cupboards

Whilst the following is only applicable to larger shops it also excludes such areas as

4.  Stairs and stair wells

5.  Lifts and lift wells

6.  Boiler rooms and service ducts

Valuing shops using comparable evidence

One method is using comparable evidence and adjusting it using zones, your judgement and knowledge. A second way is to add up the value from the Open Market Rent or OMR; this is the rent that would typically be paid on the open market by the average man in the street. Again it is a case of obtaining comparable evidence, comparing the size and location of the properties and working up an equivalent rent and then this is multiplied by yield figure which then gives you the capital value.

How do we sometimes measure a retail shop?

Sometimes we use gross external measurements when a shop is of a smaller nature, this is not to the RICS standard method of measurements but we believe it does offer a good rule of thumb.

Valuing shops using different methods

We tend to find that we use various different methods, dependent upon the shop. One of our favourite methods is comparable evidence as these shows there have been market transactions of the type of shop that we are considering. However there are also rule of thumb checks and what we would term as common sense checks.

Valuing shops using comparable evidence

One method is using comparable evidence and adjusting it using zones, your judgement and knowledge. A second way is to add up the value from the Open Market Rent or OMR; this is the rent that would typically be paid on the open market by the average man in the street. Again it is a case of obtaining comparable evidence, comparing the size and location of the properties and working up an equivalent rent and then this is multiplied by yield figure which then gives you the capital value.

Common sense check based upon rents

A scenario on a shop goes something along the following lines:

If the shop keeper makes £100 per annum (yes we have used small figures just to emphasis the point that these are not real figures) typically a landlord would look to have 50% of this i.e.

£50 for the shop owner (who is running the business) and

£50 for the landlord

This is a normal rule of thumb at 50%, there are many arguments that it should be more or less.

When the property is sold there is then a relationship between the amount sold and the rent, this we call the multiplier or the years purchase or the yield. This is called lots of names, many of which are used incorrectly but here we will use the term multiplier.

Therefore if a property is fetching a rent of £50 per annum sold for £500 then it has a multiplier of 10.

However if we then look at other transactions we can establish what the multiplier is and then if we have the rent we can establish the capital value. We do have to make sure that we are comparing apples with apples rather than apples with pears and the market rent is as correct as it can be.

To give another example:

A shopkeeper is paying £25,000 rent which then means he should be earning approximately £50,000. The valuer looks at comparable property that has been sold in the area and establishes a sales multiplier of 10 which would then give an Open Market Value of £250,000

Who are panel surveyors?

If wishing to gain a mortgage to purchase a property the mortgage lender will normally need one of their Panel Surveyors to value the property.

The criteria for the panel Surveyor, who really should be called a Valuer, varies and we would argue strongly that they do not necessarily reflect what the market would pay for the property, they reflect the risk that the mortgage lender wants to take on as they are after all a business. There are even certain differences and inconsistencies between different banks / building societies / lending institutes in our experience for example you may be able to get a mortgage with one but not another.

Just try asking to use an Independent Valuer who is not on the mortgage lenders panel surveyors and see what reaction you get from your mortgage lender. It will be along the lines of they have an approved list of panel surveyors which they wish to use which is fair enough in one sense as it's their money they are lending, or perhaps fair isn't the correct term when you understand exactly what is happening. We would argue that all Surveyors are qualified by passing Royal Institution of Chartered Surveyors (RICS) exams have roughly the same levels of skill and do not have the same vested interest as their panel surveyors. The panel surveyors are obviously obtaining regular work from the lenders therefore we would argue that panel surveyors are nothing more than ticking the boxes approving mortgages!

Valuing is not always simple but we are here to help

Whilst this is simplifying the process we hope it has given you an idea of how valuers work.

We would be more than happy to discuss the valuation processes with you and also discuss what we can do to help you in the maze of the property market.

Please see our surveying articles:

Can you trust a Surveyors Valuation?

Are surveys better than valuations?

Mortgage valuations

Independent Surveyors

If you truly do want an independent expert opinion from a Surveyor with regard to valuations, building surveys, structural surveys, structural reports, engineers reports, specific defects report, dilapidations or any other property matters please contact 0800 298 5424 for a Surveyor to give you a call back.

Commercial Property Surveyors

If you have a commercial property, be it leasehold or freehold, then you may wish to look at our Dilapidations Website at www.DilapsHelp.com and for Disputes go to our Disputes Help site www.DisputesHelp.com .

We hope you found the article of use and if you have any experiences that you feel should be added to this article that would benefit others, or you feel that some of the information that we have put is wrong then please do not hesitate to contact us (we are only human).

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