Market Value and Forced-Sale Value of a Single-Tenant Shop-Office Block for Bank Security
The subject is a four-storey shop-office block in Ipoh with 24,000 sq ft of net lettable area let to a single anchor tenant at RM2.20 per sq ft per month. The tenancy has two years to run, with no rent review before expiry, and market rent for comparable space is RM2.60 per sq ft per month. The landlord bears quit rent, assessment, insurance, management and repairs, which averaged RM180,000 over the last three years and are expected to continue. The land is leasehold with 60 years unexpired. The building is 15 years old and in fair condition; the lifts were modernised three years ago, but the roof was last waterproofed in 2016. A freehold shop-office one kilometre away, of similar size and condition but with vacant possession, sold last month at RM520 per sq ft. Yields for comparable leasehold shop-offices in Ipoh are around 6.5%. The bank has instructed a valuation for a RM5.5 million loan facility and asked for both a market value and a forced-sale value within 30 days.
1. Assess the market value for bank security using the investment method, showing the capitalisation and the treatment of the passing rent.
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Step 1: net income.
- Gross passing rent: 24,000 sq ft × RM2.20 × 12 = RM633,600
- Less landlord's outgoings: RM180,000
- Net passing income: RM453,600
Step 2: term and reversion (a single capitalisation would mislead, because the passing rent sits below market for two more years).
- Term: RM453,600 for 2 years at 6.5%. PV factor = (1 − 1.065⁻²)/0.065 = 1.8206 → RM826,000
- Reversion: market net income = (24,000 × RM2.60 × 12) − 180,000 = RM568,800. Years' purchase in perpetuity at 6.5% = 15.3846, deferred 2 years at 0.8817 → 13.564 → RM7,715,000
- Core value: RM8,541,000, or about RM356 per sq ft
Step 3: deductions the core figure ignores. A void of about six months and letting costs at reversion are foreseeable: 0.5 × RM568,800 ≈ RM284,400, discounted two years ≈ RM251,000, plus agency and legal costs of about RM40,000. Roof waterproofing is also due.
- Adjusted value: approximately RM8.2–8.3 million
Cross-checks. Capitalising the passing income alone gives RM453,600 ÷ 0.065 = RM6.98 million, which understates the reversionary potential. Capitalising market rent throughout gives RM8.75 million, which overstates it while the tenant pays less. Term and reversion is the correct compromise.
Conclusion. Market value of about RM8.3 million, subject to the tenancy and to the assumptions stated in the report.
2. Reconcile the investment-method figure with the RM520 per sq ft freehold comparable and state the value you would report.
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The comparable, unadjusted. 24,000 sq ft × RM520 = RM12.48 million. Adopting it directly would overvalue the subject by roughly 50%, which is the classic error of applying a headline rate to a different tenure.
Adjustments.
- Tenure: the comparable is freehold; the subject has 60 years unexpired. Local evidence for shop-offices with about 60 years remaining generally trades 20–25% below freehold. Apply −22%: RM9.73 million.
- Vacant possession: the comparable sold with vacant possession, which suits owner-occupiers and widens the buyer pool; the subject is sold subject to a single tenant paying below market. Apply −4%: RM9.34 million.
- Condition and location: roof waterproofing is due and the subject is 15 years old, broadly matched by the comparable on age; apply −3% for deferred capital works: RM9.06 million.
- Adjustment range: RM8.9–9.4 million, which brackets the investment-method figure at the lower end.
Weighting. For an income-producing asset bought for its yield, the investment method is the primary approach; comparison is a check on reasonableness. The gap between RM8.3 million and RM9.0 million is explained by the single-tenant risk and the short remaining term on the lease, both of which the market prices harder than a simple rate per sq ft.
Reported value: RM8.5 million, rounded, as at the valuation date, subject to and with the benefit of the existing tenancy.
Qualifications: no building survey or title search was undertaken; the report must state that the value is for the bank's secured-lending purpose only and may not be relied on by third parties.
3. Advise on the forced-sale value the bank has requested and the assumptions and conditions you would attach to it.
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Definition first. Forced-sale value is the amount a willing seller could reasonably expect in a restricted market, with a marketing period shorter than the normal period and with the seller under pressure to complete. It is not a discount applied mechanically to market value.
Derivation.
- The subject is a single-tenant leasehold asset with 60 years remaining - a narrow buyer pool even in normal conditions.
- Local auction evidence for Ipoh shop-offices shows clearing prices roughly 20–30% below private-treaty levels where the marketing period is three to six months.
- Apply a 20% discount to the RM8.5 million market value: approximately RM6.8 million. State the range as RM6.6–7.0 million.
Why not 30%. The ground floor tenant is established, the asset is income-producing and the lifts are recent; the upper end of the discount range would apply to a vacant, poorly maintained or specialised building.
Conditions and assumptions to state expressly:
- good and marketable title, free of encumbrances and caveats other than those disclosed;
- the tenancy subsisting, rent paid to date and no arrears;
- the building in good repair and free of structural defects, with valid fire and lift certificates;
- no contamination or statutory notices outstanding;
- the property offered with vacant possession of the upper floors, or subject to the tenancy as stated.
Qualifications: no building survey was carried out; tenure, encumbrances and rental information were supplied by the client and not independently verified. If any assumption fails, the value may change materially, and the report should say so explicitly. A 30-day turnaround is workable only if the client accepts these limitations in writing.