Valuing industrial property: production halls, logistics centres and business parks

A production hall from the 1990s, 12,000 square metres, fully let to its long-standing occupier, with floor slab and crane runway tailored to that occupier's manufacturing process. The lease still has four years to run. The question that decides the value is not what the hall cost to build – it is what happens to it when this one tenant moves out. Anyone commissioning a Valuing industrial property is essentially buying an answer to precisely that question.

What sets industrial property apart from other commercial property

Office and retail properties can generally be re-let without touching the building fabric. With industrial properties it is different: here the intended use shapes the building right down to its structure.

A hall with a clear height of 4.5 metres, a tight column grid and a floor slab rated for five tonnes per square metre is unusable for modern contract logistics – there, ten metres and more, wide column grids and a higher load capacity are expected. Conversely, a 14-metre high-bay warehouse is of little use to a metalworking business that needs crane runways and heavy-duty floors. The market for any given property is therefore often narrow, and the number of potential subsequent users is the real valuation question.

In addition, a considerable share of the investment regularly sits not in the building but in the technical installations – cranes, extraction systems, compressed air generation, process cooling, paint shops. For tax and valuation purposes these components are operating equipment and do not belong in the building value.

The property types and their value drivers

Behind the umbrella term lie properties with very different risk profiles.

Which valuation method fits

Under section 6 ImmoWertV, the decisive method is the one that reflects market behaviour. With industrial property this generally points to the income approach – with one important exception.

• Let properties with a marketable layout – the Income approach under sections 27 et seq. ImmoWertV is the leading method; where cash flows are uneven and leases are expiring, the periodic method under section 30 ImmoWertV is preferable.
• Institutional portfolios and acquisition reviews – the DCF method explicitly reflects lease expiries, refurbishment costs and exit scenarios and is the standard for international addressees.
• Owner-occupied properties without a comparable market – here the Cost approach has its place, but only with carefully substantiated economic depreciation. Without it, the method systematically produces excessive values for special-purpose properties.
• Underused sites in good locations – where the land value less clearance costs exceeds the income value, the Liquidation Value governs. For inner-city legacy sites with conversion potential, an additional Residual value calculation is called for.

Structural features that carry the value

Unlike residential property, the quality of an industrial property can be pinned down using measurable parameters. These belong in every site inspection:

• Clear hall height – the key figure for storage capacity. Below seven metres a property is generally no longer competitive for modern logistics.
• Floor load capacity and flatness – decisive for racking systems and industrial trucks; often the most expensive item to retrofit in existing properties.
• Column grid – wide grids allow flexible racking and production layouts, tight grids considerably restrict subsequent use.
• Loading arrangements – number and type of doors, ratio of dock to ground-level doors, manoeuvring areas and lorry parking spaces.
• Cranes and utility supply – lifting capacity, number of crane runways, electrical connection capacity, compressed air, process water and effluent treatment.
• Fire protection – sprinklers, fire compartments and firewater retention determine which goods may be stored and thus the range of potential tenants.
• Share of office and staff areas – a high office share tends to be a disadvantage in logistics properties, whereas production businesses require it.

Location: accessibility beats address

For industrial property, what counts is not location quality in the residential sense but the operational suitability of the site. The decisive factors are the distance to the motorway junction and whether the access road can take heavy goods vehicles, any rail siding or proximity to an inland port or terminal, the availability of labour in the catchment area, and the permit situation for multi-shift and night operations.

The last point in particular is frequently underestimated: a hall that cannot be served around the clock because of emission control conditions is largely worthless for contract logistics – regardless of its structural quality.

Public law framework

With industrial properties, the planning and emission control position is not incidental but directly determines value.

First, the planning law classification: the German Land Use Ordinance distinguishes commercial zones (section 8) from industrial zones (section 9). Only in an industrial zone are significantly disruptive operations generally permitted – a property in a commercial zone simply cannot be permitted for some potential users. Existing properties often enjoy grandfathered rights, which are however lost on a change of use or an extension.

Next, the emission control permit under the Federal Immission Control Act: it attaches to the installation, not to a person, and therefore generally passes to a buyer – but its scope limits the permitted use. The conditions on noise under the Technical Instructions on Noise Abatement, on air quality and, where applicable, under the Major Accidents Ordinance belong in the valuation report, as do any dismantling and aftercare obligations on closure of operations.

Contaminated land: the single largest risk

No other feature can consume the value of an industrial property as quickly as soil contamination. Former uses involving solvents, mineral oils, electroplating or metalworking leave damage that persists in the soil and groundwater for decades.

For the valuation the rule is: a suspicion of contamination is not a flat-rate deduction but a matter of fact to be established specifically. What must be examined is the contaminated sites register held by the competent authority, the site's history of use and any existing investigations under the phases of environmental due diligence. The remediation and monitoring costs so established are to be deducted separately as a special property-specific characteristic under section 8 (3) ImmoWertV – not hidden in the property yield rate. Where reliable investigations are missing, this must be disclosed in the appraisal report and the value made subject to a corresponding reservation.

Answered briefly in our questions and answers: How is a property with contamination or hazardous substances valued?

Separating building and operating equipment

The distinction between the building and operating equipment is of considerable economic significance for industrial properties. Operating equipment serves the business operation directly rather than the use of the building – this typically includes cranes, process pipework, silos, paint shops and extraction systems, as well as special foundations for machinery.

This distinction governs the purchase price allocation and hence the depreciation, the assessment basis for property tax and the scope of real estate transfer tax. It regularly changes the tax assessment bases by an order of magnitude that justifies the effort of a careful allocation many times over.

Energy and ESG as new value factors

For institutional buyers and lending banks, sustainability characteristics have moved from supplementary information to a component of price. For industrial property specifically: the energy condition of the envelope and heating technology, the presence of a photovoltaic installation on the large roof areas or the structural capacity to retrofit one, charging infrastructure for vehicle fleets, and certifications such as DGNB or BREEAM.

Properties without these features are not unsaleable, but they meet a smaller circle of buyers and higher yield requirements. For the valuation this means: the retrofit requirement belongs in the derivation as a specific block of costs, not as a vague addition to the discount rate.

Typical valuation occasions

• Transaction and Due Diligence – determining the purchase price, reviewing leases, permits and the contamination position.
• Financing – in the mortgage lending value report under the BelWertV, limited alternative use potential has a direct effect; section 5 BelWertV expressly requires a statement on the point.
• Financial Reporting – fair value under IFRS 13 and the value to be attributed under the German Commercial Code for annual and consolidated financial statements.
• Taxation – purchase price allocation, depreciation, property tax and real estate transfer tax.
• Business succession and restructuring – contribution in kind, business splitting, hiving off property assets.
• Site closure – determining the liquidation value and examining the potential for conversion.

What a robust appraisal report must contain

• the structural parameters – clear height, floor load capacity, column grid, number of doors and cranes with lifting capacity,
• a substantiated statement on the alternative use potential naming realistic subsequent users and estimated conversion costs,
• the lease analysis with the weighted remaining term, indexation and the allocation of repair obligations,
• the planning and emission control status including grandfathered rights and conditions,
• the contamination position with the entry in the register and an assessment of the remediation costs,
• the distinction between building and operating equipment,
• a cross-check of the income value against the cost and liquidation values.

Conclusion

Valuing industrial property means capturing a building, a permit status and an operational use together. Floor area alone says little: value is determined by the structural parameters, the breadth of the possible circle of subsequent users, the legal admissibility of the use and the environmental position of the site.

Methodologically the ImmoWertV framework holds, provided the income value is derived from market evidence, the alternative use potential is expressly appraised and the liquidation value is carried along as a floor. Anyone who discloses these points delivers an appraisal report that stands up to buyers, banks and the tax authorities.

Related special-purpose properties with a similar dependence on operators and technology are covered in the article Valuing data centres

Answered briefly in our questions and answers: How is a commercial property valued?

How value is derived from sustainably achievable income is shown by the Income approach.

The article demonstrates how to value special-purpose properties with pronounced operator dependency. Valuing event arenas and stadiums: What determines the market value of a multi-purpose arena