The rental value of retail real estate is the expected market rent that a space can achieve at a given point in time. The market value is the sale price that an investor is willing to pay for that real estate object as a whole. Both concepts are closely related, but measure fundamentally different things: the rental value expresses the return, while the market value reflects the capital position. For retailers looking for retail space and for owners who want to know what their property is worth, understanding the difference is crucial. This article answers the most frequently asked questions about both concepts and their relationship.
How is the rental value of a retail space determined?
The rental value of a retail space is the rent per square meter that a tenant and landlord would agree upon in a free market, without special circumstances or external pressure. Appraisers and agents determine this value based on comparable lease agreements in the same street, the same retail area, or the same type of location.
The most important factors influencing rental value are:
- Location type: An A1 location on a busy shopping street has a structurally higher rental value than a B or C location in the same centre.
- Footfall: The more pedestrian traffic, the higher the sales potential and therefore the rental value.
- Size and layout: Shop frontage width, floor layout, and storage space influence the functional value.
- Market conditions: Supply and demand in a specific city or street partly determine what the market is willing to pay at any given time.
Reliable rental value assessments require access to up-to-date transaction data. KroesePaternotte has a database of lease contract data going back to 1984, covering virtually the entire Dutch retail market. This historical depth makes it possible not only to determine the current rental value, but also to substantiate trends per location.
How is the market value of retail real estate calculated?
The market value of retail real estate is the price at which a property would change hands on the open market between a willing buyer and seller, after proper marketing and without special pressure. This value is typically determined through an appraisal, in which the rental income of the property is capitalised at a market-conform initial yield.
The most commonly used method is the rental value capitalisation method: the rental value is divided by the desired gross initial yield. If a retail space has a rental value of €80,000 per year and the market yield for that type of location is 6%, the indicative market value is approximately €1.33 million. In addition to this method, the discounted cash flow method and comparative sales transactions are also used, depending on the type of property and the availability of reference transactions.
Factors such as vacancy risk, lease term, tenant quality, and the condition of the property adjust the outcome upward or downward. For more complex properties, such as shopping centres or large-scale retail parks, multiple methods are generally needed to arrive at a substantiated value.
What is the relationship between rental value and market value?
The rental value is the primary input variable for the market value of retail real estate. Without a reliable rental value assessment, a market value determination is not possible. In this sense, the rental value is the foundation upon which the market value is built.
The relationship works as follows: a higher rental value leads directly to a higher market value when the yield remains constant. Conversely, a decline in rental value — for example due to decreasing footfall or structural vacancy in a retail area — puts pressure on the market value. This makes the rental value relevant not only to tenants and landlords, but also to investors who wish to monitor the capital development of their portfolio.
The yield at which the rental value is capitalised reflects the risk profile of the location. A stable A1 location in a major city has a lower yield than a standalone retail property in a peripheral location, meaning that the market value at the same rental value is higher at the better location.
When do rental value and market value diverge significantly?
Rental value and market value can diverge significantly when the contract rent differs substantially from the current market rent, or when investors’ yield requirements shift sharply due to external factors such as interest rates or risk perception.
Concrete situations in which the divergence can be large:
- Lease contracts above or below market level: A property let at a rent that was fixed many years ago may have a contract rent that is far above or below the current rental value. The market value is then adjusted for the difference between the contract rent and the rental value.
- Structural vacancy in a retail area: If a retail area is under sustained pressure, the rental value declines, but the market value may fall even more sharply because investors demand a higher risk premium.
- Rising interest rates: Higher interest rates increase investors’ yield requirements, causing the market value to fall even if the rental value remains stable.
- Incentives upon letting: Rent-free periods or contributions to fit-out costs reduce the effective rent, making the true rental value lower than the nominal contract rent suggests.
Which value is relevant when renting a retail space?
For a retail entrepreneur looking to rent a retail space, the rental value is the most relevant benchmark. The rental value indicates what a market-conform rent is for a specific location, and thereby provides the reference for assessing whether an offer is reasonable.
The market value of the property is in principle not directly relevant to the tenant, unless there is a purchase option or a sale-and-leaseback arrangement. What is relevant, however, is understanding that a landlord bases their rent partly on the market value they wish to achieve or maintain for their property. A tenant who knows the rental value is in a stronger position in negotiations.
Many start-up and growing retailers do not know what a market-conform rent per square meter is for a specific street or city. Through the retail space rental services of KroesePaternotte, tenants gain insight into current rents per location type, including guidance during negotiations based on concrete market data.
How do rent reviews affect the value of retail real estate?
Rent reviews directly affect the rental value and indirectly affect the market value. When a rent review brings the contract rent in line with the current market rent, the cash flow of the property changes, which in turn adjusts the market value.
In the Netherlands, a tenant or landlord can apply to the court for a rent review after the agreed lease period if the contract rent deviates from the rental value. The court then assesses based on the average rental value over the past five years, derived from comparable transactions. This makes reliable transaction data essential for both parties.
For investors, an upward rent review increases the market value of the property, while a downward review reduces it. Institutional investors and banks therefore commission periodic appraisals to monitor the current market value of their portfolio. KroesePaternotte, as the largest retail valuation specialist in the Netherlands, carries out such appraisals for all major banks and institutional parties, with quality and independence assured in accordance with RICS and NRVT standards.
For retailers who anticipate or wish to initiate a rent review, it is advisable to know in advance what the market-conform rental value is for their location. View the current retail listings or get in touch for an independent assessment of your rent.
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