Typically, the assets corporate companies own and occupy are unique to their own purposes and are therefore classed as bespoke. This is often due to a number of factors; the most common of which is that the asset was built to meet the needs of the business at a specific time and can be located in non-established commercial markets. So, whilst the asset often has a significant value to the current owner as it supports their business operations, there may be limited demand from other occupiers should it become surplus to requirements. For the purpose of this article, we are considering how a surveyor can approach the valuation of such a property and the key drivers that need to be considered.
The valuation challenges
From a valuation perspective this can create many challenges as valuers are normally asked to provide an assessment of value based on a single scenario of Market Value, ie what a property would sell for in an arm’s length transaction between a willing buyer and willing seller. This is normally estimated through the use of comparable evidence, which for this type of asset is often limited and where there is very little identifiable occupational demand. Often the result is that there is a low or negligible Market Value under this definition and approach. Which, depending on the scenario or the purpose of the valuation, may not provide the client with the most appropriate advice.
Therefore, it is crucial to understand the driver of the valuation and the purpose for which it will be used. For example, when considering a valuation prior to a potential disposal there may be a range of possible values depending on the type of transaction. If the real estate forms part of a business disposal and the real estate will remain crucial to the ongoing operations, then it is likely to result in a higher figure than if the real estate were to be vacated and sold without a business which requires its functionality. Therefore, in this scenario we would often consider that to provide the client with the best advice it is important to consider the various scenarios and provide context behind each.
Alternative use scenarios and depreciated replacement cost method
An example of this is when a pharmaceutical client approached our team with a large piece of land which had previously been used as a laboratory and R&D site. Firstly, we considered whether there would be third-party demand for the property and/or the business being undertaken. Working with the client we identified that it was their intention to cease operations and close the facility. After conducting an inspection of the asset, we also identified that the property was ageing and bespoke in its design, and therefore was judged to have no third-party occupational demand.
Given that reality, we worked closely with our planning and agency teams within CBRE to determine alternative use scenarios and were able to provide them with a thorough piece of advice, outlining the risks and benefits for applying for a change of use for both residential and industrial land and the potential rewards for each.
Another example of how the purpose of the valuation can dictate the approach that we would undertake is when we were recently asked to undertake the valuation of a portfolio of purpose-built abattoirs for a client who was in the process of a business acquisition. Ordinarily, an investment approach is adopted for general manufacturing facilities, but due to the bespoke nature of the units, which were specifically designed for the requirements of industrial butchery, comparable units were non-existent.
Given that the valuation was for Purchase Price Allocation as part of a financial reporting exercise, we adopted a Depreciated Replacement Cost (DRC) method of valuation to understand the worth of the assets to the occupier in their current use. The underlying theory of the DRC is that the potential buyer in the exchange would not pay any more to acquire the asset being valued than the cost of acquiring an equivalent new one. In doing this, it gave us a top-level value for the site.
We therefore also provided our client with land values for the assets reflecting the baseline for industrial land values and an income approach was adopted for the assets we deigned to have alternative use as general manufacturing. This triple-pronged approach provided the client with clear advice for the current worth of their asset in its existing use, as well as the value to a third party coming in, whether to occupy the site in its current use or to develop for an alternative purpose.
It is critical to understand the bigger picture that is driving the valuation need
Given the current dynamics taking place in the Corporate world, with occupiers having to reassess their real estate footprint means that it is crucial for occupiers to procure valuation advice which is relevant to their needs and requirements. We understand the bigger picture that is driving the valuation need, whether transactional, broader corporate strategy or for a specific financial accounting need. The Corporate Valuation Services team are the only valuation team who offer a managed consultancy and advisory service, with scope to cover our client’s global assets. We provide a single point of contact, with the unique expertise and knowledge across all asset classes on a completely cross-border basis.