Meaning
Assessment of the anticipated capital worth of a leased property at the point when the current occupancy agreement ends. This calculation focuses on the potential for increased income when a building returns to the control of the owner and can be re-let at current market rates. In commercial real estate, reversionary valuation is used to determine the total return on an investment over a multi year period.
It accounts for both the present income stream and the future terminal value. The final figure represents the value of the landlord’s interest after the lease expires.
Market Rent
Current pricing for comparable spaces provides the baseline for estimating what the property will earn in the future. If the existing tenant is paying a rate below the current market, the reversionary valuation will likely show a notable increase in the total value of the asset. This gap is known as the reversionary potential.
Discounted Cashflow
Future earnings must be brought back to a present day figure using a specific yield or interest rate. The accuracy of a reversionary valuation depends on selecting a discount rate that reflects the risks associated with the location and the condition of the building. A higher risk profile leads to a lower present value for those future gains.
Yield Analysis
Investment comparisons rely on these figures to determine where to allocate capital. While the initial yield might be low, a strong reversionary valuation can make a property attractive to buyers looking for long term growth. It provides a clear picture of the upside available once the current lease terms expire.
