The Challenges of Valuing Above Commercial Property

We are regularly instructed to prepare valuations on leasehold flats located above commercial premises. The shortage of properties at the lower end of the housing market makes the purchase of this type of property increasingly popular. However, the presence of the commercial element below makes the task of providing an accurate valuation more difficult.

Small shops frequent high streets across London usually forming the ground floor of Edwardian and Victorian properties. These types of property were originally built to serve the local community. The residential premise above was intended for owner-occupiers where the shopkeeper also occupied the residential property. Times have changed and there are now far fewer business owners who ‘live above the shop’ and it is now more common for the accommodation to be rented out on a shorthold tenant agreement with the shop below leased to a trader. The freehold is normally owned by an individual or company who holds the interest as an investment.

The most commonly implemented method of valuation is the comparable method. A comparable is defined by the RICS as ‘an item used during the valuation process as evidence in support of the valuation of a different item of the same general type’.

The difficulty with valuing residential property above commercial premises arises from the lack of comparable sales data available for analysis. Despite gradually increasing numbers of residential premises above commercial elements becoming available on the open market, the small number on the market and completed sales means identifying comparable evidence is extremely challenging.  The complexity increases when taking into consideration the use of the commercial property below and its influence on the value of the residential property above.

The type and use of the commercial premise below and adjacent must be taken into account when making a comparable analysis of the limited open market sales evidence that is commonly available. The valuation must account for any potential nuisance including noise and smell. For example, a flat above a florist would be much more desirable than a property above a takeaway restaurant.

Another key consideration is the lease, when purchasing a leasehold property, the buyer should be aware of who owns the Freehold interest. The purchaser should enquire as to whether the freeholder of the flat has granted a lease to the commercial element below, meaning that should any issues arise it can be dealt with by the mutual freeholder. The lease of the property below must be considered both to identify the current use and the feasibility of any changes of use.

The right to enfranchise on the freehold under the Leasehold Reform Housing & Urban Development Act 1993 (as amended) is subject to the leaseholder being deemed a qualifying tenant. The ratio of commercial to residential is key as if the commercial element of the property is more than 25% of the total property the tenant will not qualify and consequently loses their statutory right for enfranchisement. This doesn’t eliminate the option but the loss of statutory right does mean that the power is very much in the Freeholder’s favour. This is however irrelevant if the leaseholder simply wishes to extend their lease under the same Act of legislation.

We have extensive experience in undertaking complex valuations of this type so if you require assistance or just have an initial enquiry please contact us by email or by phone on  020 7183 2587.