The new way to value a rent roll

COVID-19 has impacted the way commercial and residential rent rolls are valued. Find out what has changed. 

2020 had one of the most difficult starts to the year any of us remember and the flow-on effects are likely to last for many months. 

Real estate has been impacted in several ways, first by people losing their jobs or being forced to shut down their business so they cannot pay rent. Then there is the suspension of auctions and open homes, which has put a lid on property sales. And finally, international uncertainty has led to many people putting their plans to buy or sell on hold. 

Rent roll sales have been impacted as well, partially because of a disrupted market across the board but because the ‘standard’ way of valuing a rent roll has been forced to change.

What’s interesting is rent roll sales are still taking place. This is because the current crisis has resulted in some agencies needing to urgently sell and others taking the opportunity it presents to buy at a competitive price. 

The ‘old’ way to value a rent roll

In the past, a rent roll was generally valued by looking at the following data:

  • Properties under management

  • Average weekly rent

  • Average management fee

  • Any additional income through fees and charges 

  • Number of landlords

  • Outstanding accounts

  • Business operating costs

At BDH Solutions I have always taken the approach of analysing the rent roll at the valuation date, not based on historical data which may have significantly changed. It is strongly recommend anyone buying or selling asks their valuer to do the same and also push for this to be agreed on in writing to avoid discrepancies in the way a rent roll is valued. 

The new way to value a rent roll

Due to COVID-19, the way a rent roll is valued needs to be adjusted. 

Now, the valuer must account for the new rules around rent reduction and rent relief in Victoria or whichever state you are selling in. 

For example, you may have 200 properties on your rent roll and be looking to sell them all. In the past, the valuer would calculate the value partly based on the rent paid by tenants. 

In six months, however, 50-100 of the tenants on your rent roll may have experienced hardship to the extent of rent going unpaid. Considering there is a freeze on rent increases and a moratorium on tenant evictions, plus the encouragement for tenants to negotiate their rent, the amount of rental property income may have changed significantly. 

The way a rent roll value is calculated now needs to be adjusted to accommodate these extraordinary rules and circumstances. 

Your valuer will use their own data and extrapolation techniques to come up with a figure. However, they may recommend you put clauses and caveats in place which enable flexibility on the final amount at settlement. 

If you’re looking to buy or sell a rent roll right now, one of the most important things you can do is make sure everybody is on the same page. This includes the party you are negotiating with, your accountant, any other valuers and the rent roll broker. Everyone should come together to agree on the way the roll will be valued and the transition periods etc, so it is easier to reach a final price and negotiate the terms of the sale. 

More than ever, the value of a rent roll depends on the specific factors involved. Your valuer may take into account the types of tenants and their likely circumstances, the landlords’ financial positions due to the crisis, and the predicted impact the nation’s strict trading restrictions will have on commercial tenants’ incomes.

As mentioned, the market is definitely active right now as real estate agencies look to free up cash or rearrange their business model. With an expert on your side, you’ll be able to understand the true and long-term value of the rent roll you wish to purchase or sell.  

Read more about valuing a rent roll here.

BDH Solutions are rent-roll agents with over 30 years experience in connecting the right vendor with the right purchaser. To stay up to date with our latest listings, register here.