FACTORS DETERMINING RENTAL VALUE OF COMMERCIALIZED WAREHOUSE
The determinant of rent is one of the comparative data required under the data programmer. Rent data can be derived in the following ways.
a) On the basis of rent actually paid
b) On the basis of comparison
c) As a proportion of profit
d) In relation to costs.
A. THE ACTUAL RENT PAID
Where the property is let at an economic rent and letting is a recent one, the rent actually paid provides a good evidence of market rent. Economic or market rent is that which a tenant, using the property or premises for their highest and but use, is warranted in accepting. This is the same as rent on free market basis as. This market rent concept is the normal basis for a gross income projection in appraisal practice. All such projections are based upon a reasonable foreseeable future.
Rent being paid may sometime not be the market or economic rent. They are many reasons why this may be so. The under mentioned points demand careful attention in income flow estimation using rent passing:
i) The date of the lease or the tenancy: A rent which was fixed many years ago will be an unreliable guide to the true economic rent today.
ii) Whether any form of consideration was received when the lease was granted, for instance, a premium may have been paid on entry of previous lease for the current one or the lessee could have contented to carryout, at his cost, improvements to the property.
iii) Whether there is any family or business relationship between the lessor and the lessee which may result in the rent being less than market rent.
B. COMPARATIVE RENTS:
Comparative market evidence provides the basis for market. The study and analysis of these comparable market factors may however require appropriate adjustments to the rental evidence before it will serve as basis for estimating the income flow of the property being valued.
Where the property being valued is vacant or owned occupied, the evidence provided by other letting may be the only guidance available in assessing the income.
C. RENT AS A PORTION OF PROFIT: The rent of a property can be determined as a proportion of the profit made from using the property for business. This goes back to the concept of land as a factor of production. Commercial land use are occupied as a rule by tenants who expect to make profit out of their occupation and expectation will, in the long run, determine the rent that such tenants are prepared to pay. In the case of a shop, the prospective tenant will ask himself the following question:
i) What is the turnover likely to be, bearing in mind the general situation of the shop?
ii) What will the probable gross profit be, knowing that the average profit on turnover in a (tenant’s) particular business is so much percent?
iii) What are the expenses likely to be in the way of wages, lighting, repairs and rates?
iv) What sum will be available for rent after allowing all expenses, interest on capital and reasonable remuneration to my (tenants) effort by way of net, profits?
It is seldom, either in the case of commercial property that a rent is fixed by detailed analysis of estimated profits in this way. One major difficulty is that of fixing on arbitrary allowance for tenant’s remuneration. But consideration of profits must always have a vital influence on rents. It is possible, where accurate accounts are kept, for the rent as a portion of profits, if kept over the years in business provides the percentage attributable to the property.
D. RENT IN RELATION TO COST
In the absence comparable, a proportion, normally in percentage, of the cost expended on developing a property could be used to determine rent attributable to the property. This is based on the principle of contribution of land and building to the production of the income generating product. A percentage of the cost of production provides a measure of the income to be earned by the land and buildings. In everyday practice, when improvements are placed on land to make land productive in conformity with the principle of highest and best use, an economic merger take place that weds the investment part into an economic unit or property as a whole. Physically we can describe the nature character of land and separately, the amount, kind and quality of the improvements. But income derived from the operation is a product of the joint property and not an aggregate of those of it parts.
But generally, the rent passing on a particular property is determined by the interaction of the economic forces of demand and supply operating in the market, thus affecting the property. According to Lerano, (1992), statutory factors may also affect rental values, apart from demand and supply factors. He went on to say that rental values will raise when there is more demand for accommodation. Again improvement in infrastructural facilities may also lead to a rise in rental values in an area and similarly, if there is a change in the economic base of an area, property values generally and rental values specifically are likely to be affected.
Where supply of accommodation cannot respond to increase in demand, rental values will be affected. However, both the demand and supply factors are affected by some factors which may be necessary note in the course of the research for a better understanding of the study.
As was pointed out earlier, much of the theories on urban rent have been centered on the location of the site which is a function of the accessibility of the site to the city centre.
According to Alonso (1968) the following factors have been cited as determinants of urban rents.
i) Accessibility of the site to potential customers.
ii) The size of the site, the site location and intensity with which are complementary in terms of both attracting potential customers or existing units, cutting costs, whether they be production, services, advertising, to mention a few. All these factors can be summarized under the broad umbrella, location and accessibility as they affect rents.
Apart from accessibility and location, changes in population have a tremendous influence on the rent passing on property, especially residential properties because shelter is a basic necessity of life. “Other things being equal, an increase in population will result in higher rent and densities”. (Alonso, 1980) conversely, any decrease in population will result in lower rent, depending on the supply situation.
The level of activities at any period helps in the fixing of rents on properties. In times of prosperity, business and enterprise are vigorous and there is enough cash flow into the economy. This eventually creates necessity for new and larger accommodation leading to higher demand that cause rental increase. Conversely a dwindling economy results in lower rent.
The peculiar nature of a property helps in determining the rent that will pass on it. Factors such as the architectural design, construction and materials used also account for difference in rents passing on properties. Obviously, a property made of mud walls cannot attract the same rental value as a property made of cement block walls. Use of louver glasses, or decoration window, protectors may even account for difference in rent passing on properties. If there is a change in fashion it will attract higher demand on rents than properties that remain insensitive to the change.
Example is the massive use of Alumaco sliding door and flush doors. Services provided in the property, such as electricity, water and sanitary services also affect the rent on a property.
If two properties are comparable in all respects, except the services provided, it is obvious that the property with higher quantity and quality of services will attract more buyers resulting in higher rent.