A case for thinking rental calculations

There are times that industries can be a little like a flock of sheep. If some of the flock turn one way, the rest will too. Or as  Donald Trump would do: say it enough times and it must be true.

And the way we calculate rentals is a little like that. The size of the building times a pre-determined rental rate. Plus perhaps add something for carparks. And that's the way everyone does it. So it must be correct. And because valuers use that methodology then of course it must be right.

But perhaps there is a case for adopting a different viewpoint. How about setting the rental based on the utility of the building?

When we rent an hotel room for the night the rate is not based solely on the size of the room. There are a mix of other factors that go into setting the price - location, reputation, ancillary facilities, quality, demand and more. When we buy a car, the price is not solely based on size, or seating, or engine capacity, or even looks. An element of the price is based on hard to measure elements such as the cachet of the brand.

In real estate there are examples where the “soft” elements of the calculation already occur – retail space in Queen St will command a far higher rate than retail space in a suburban strip. But often pricing of industrial space has far too little weight given to factors such as ease of access, stud height, utility of space and even access to public transport. And then too much weight is given to office space, even if such office space is superfluous to most users’ needs.

It is obviously easiest to undertake a valuation by plugging numbers into an equation, and then comparing to others in the area – or even as we often see, others in a totally different area. Numbers are numbers after all. But we see the real skill in evaluating values lies where the multitude of other factors are taken into account.