Understanding the Difference in Property Values for Owner-Occupiers vs. Investors in Commercial Real Estate
When it comes to property valuation, the perspective of owner occupiers and investors can lead to a discrepancy in property values. Each group approaches real estate with distinct priorities, motivations, and financial considerations, of which ultimately shape their level of demand and overall sense of value toward a property. This consideration of which can pose an intriguing question from a valuer’s perspective: What is the value of a property if it was to be sold today? Below are some key points to consider which can result in a difference in value from an owner occupier versus a private investor.
Motivation and purpose
The primary difference between owner occupiers and investors lies in their motivations. Owner occupiers seek a property that meets their personal/business needs, proximity to home and neighbourhood amenities, to name a few. In contract, private investors are primarily focused on the potential for financial returns, inclusive of rental yield and overall capital growth.
Market Sensitivity
Owner occupiers may be less sensitive to market fluctuations, especially if they intend to stay in the property long-term. Their emotional investment can make them more inclined to overlook shifts in the real estate and financial markets. Investors, however, are often more reactive to market conditions, inclusive of interest rates, increases to taxes such as Lan Tax, and changes to the rental marketplace. Such being evident in the current real estate market cycle, with private investors, in general terms, wanting an increased rental yield of up to 0.50% to 1.00% as compared to the previous two (2) year period. Now, whether investors are getting that desired increased return is yet to be seen, with recent results suggesting an increase in yields of circa 0.25% to 0.50% over the 2024 calendar year.
Impact on Property Prices
The differing purchasing approaches from owner occupiers and private investors can have a potential impact on overall property prices in a given area, resulting in a quasi two tier market. In some areas, we are seeing a variance of up to 10% to 15% in the prices being achieved for owner occupied/vacant properties as compared to that of investment properties.
From a valuation perspective, this again lends itself to the question of what is the property worth in today’s market? In simple terms, the valuer must be cognizant of the basis of valuation, i.e. if the property is encumbered by a lease covenant, the likely purchaser of the property would be a private investor and not an owner occupier.
Conclusion
In today’s real estate market, it is important to recognize that each property may have two distinct values: one when it is encumbered by a lease covenant (attracting investors) and another when vacant (appealing to owner occupiers).
For valuer’s, it’s essential to clearly explain the valuation methodology used in their reports. This includes detailing how these two values may differ and the reasons behind those differences. Providing this context and transparency helps clients understand the property’s value and ensures that clients are well informed and can make strategic choices based on accurate assessments.
To discuss any related property matter herein or other issues, please contact Mark Ruttner, Managing Director
mr@fvg.com.au 0411 419 674
First Valuation Group
Suite 110/181, St Kilda Road, St Kilda, Victoria, 3182
valuations@fvg.com.au
