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THE notoriously difficult valuation of shopping centres may be at an end, thanks to a new valuation tool developed by Rode Valuations. Property valuers have over the past decade been using equations - generated by the property journal Rode's Report - that use the market rental rate that an office or industrial property commands to calculate its capitalisation rate.

The capitalisation rate is the property equivalent of the forward earnings yield of equity, and as such is a crucial determinant of market value. Thus property valuers widely use capitalisation rates to arrive at market values of income-producing properties, albeit mostly in conjunction with discounted cash flow techniques.

Rode chief executive Erwin Rode says arriving at a capitalisation rate for individual shopping centres is difficult, as no two shopping centres are the same and few sales take place. Market rental is influenced by a myriad value determinants, such as location, size and tenant mix. 'Even establishing the market rentals of individual centres is a problem, because some landlords are not prepared to divulge the ruling rental rates of their centres to researchers.

'As a result we have no way of directly linking the two most important value determinants - capitalisation rates and gross market rentals - to arrive at a value.'

However, a solution seems to be at hand. Through their valuation of a large number of big and small centres all over the country in 2002, Rode linked the capitalisation rates as per its Rode's Report surveys (i.e. the capitalisation rates by type of centre/centre size) to the gross market rental rate these centres command per 100 square metres of space.

'In this way we ensured that our resulting capitalisation rates were within the Rode's Report survey frame and we ensured a consistent correlation between capitalisation rates and market rental rates. 'This relationship between the capitalisation rate and market rental rate applicable to 100m2 shops now allowed us to build a regression equation to estimate capitalisation rates of a centre, given its market rental rate. 'One can argue that this approach is not 100% empirical, but at least it is internally consistent,' Rode says. Enquiries: Erwin Rode at 021 946 2480 or 082 431 7193