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Trade Related Properties

  • Writer: Kobus van der Walt
    Kobus van der Walt
  • Feb 5
  • 2 min read

Description

It is any property designed for a specific type of business where the property value reflects the trading potential of that business.

In other words, the profitability of the business in the TRP (Trade Related Property) will determine the rental levels the business can afford to pay, and hence the price a buyer will be prepared to pay.

This is a specialised type of valuation.

 

Examples are:

  • Hotels

  • Guest houses

  • Fuel filling stations

  • Caravan site

  • Racecourse

  • Brewery

  • Cinemas

 

Valuation Approach

The Income Approach is applied.

International Valuation Standards (2025: 36) states, “The income approach should be applied and afforded significant weight when the income-producing ability of the asset is the critical element affecting value”.

The Comparable Sales Approach cannot be applied because there will not be credible comparable sales data available, due to the fact that the property is uniquely developed for the specific type of business.

  

Calculation

Step 1.

Determine the Fair Maintainable Turnover (FMT) that “a reasonably efficient operator” could generate.

Step 2.

Determine the Fair Maintainable Operating Profit (FMOP).This is the profit, prior to depreciation and finance costs, that the business would expect to derive from the FMT. This should include an allowance for periodic expenditure such as decoration, refurbishment and maintenance.

The FMOP is effectively the same as the EBITDA.

 

Adjusting the Income / Expense Statement

The FMOP (EBITDA) must be sustainable and credible.

  • Only normal recurring income and expense items should be included.

  • Once-off items must be excluded.

  • Salaries of management that are higher / lower than a market-related salary must be adjusted to market-related levels.

 

Divisible Balance

The FMOP (EBITDA) needs to be shared between the PropCo (owner of the property) and the OpsCo (owner of the business).

The landlord’s portion is represented by the rent he receives.

The business owner’s portion represents his remuneration for his management time, effort and business risk he is taking.

 

Industry Norms

Usually, the rent paid to the landlord is 30%-50% of the FMOP (EBITDA).

Thus, the business owner receives 50%-70%.

These ratios are influenced by the business risk inherent to the specific type of business.

 

The business owner will receive 70% if the business has a relatively high risk, because the owner must be compensated for the high risk.

In this scenario, the landlord will receive only 30% as rent.

However, there are always exceptions. The valuer must have experience in these types of valuations to allocate credible divisional ratios.

 

Value of the Property       

The rent that the landlord receives is gross rent.

He needs to pay property expenses such as insurance, accounting fees, structural repairs, etc.

These expenses must be deducted to calculate the net rent.

The net rent is then capitalised with an appropriate capitalisation rate to estimate the market value.

 

Appropriate Capitalisation Rate

Because there are no comparable sales of comparable properties available to derive the appropriate capitalisation rate from transactions that took place, the capitalisation rate for the office sector, as published in Rode’s Report, is credible.

 

Most Common Errors Made

  • Applying the Comparable Sales Approach by using comparable sales that are not credible.

  • Does not calculate the FMOP (EBITDA) correctly.

  • Does not divide the FMOP (EBITDA) between the landlord and the business owner with an appropriate and credible ratio.

  • Apply a capitalisation rate that is not credible.

 
 
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