Awarded (ex-aequo) with Cédric Chapelle for his doctoral thesis on “l’expertise civile à l’épreuve des droits fondamentaux”


EEEI award: 2020 : Practical method to appraise retail real estate – Rental value & keymoney

by Grégoire Dupont


Retail real estate value’s DNA

What characterizes the value of a real estate used for retail ? What is the key factor, the DNA, of its value ?

One immediately thinks of the surface. However, two stores identical in all respects but located in two different cities will not necessarily have the same rental value. Could it be the location then ? Not more, since two neighbouring stores, with the same total surface area, will not necessarily have the same market rental value.

Let’s break the suspense. The essential factor in the value of a retail real estate is its ability to generate profit margin for its operator. “Profit what ?” are you asking me. Profit margin. In other words : turnover reduced by its costs. The greater the profit margin (excluding rent) of the operator, the more he has the capacity to pay a high rent. The market sale value itself being directly dependent on the return (i.e. the rent) of a commercial real estate, it will therefore also be directly dependent on the margin.

The greater the footfall, the larger the surface, the higher the visibility… the more turnover will be significant, hence the margin important, hence the rent affordable. The more uniform the surface, the more it is easy to operate, the less it requires staff… the lower the costs. That is all beneficial for the margin and the ability to pay rent.

Combining real estate ownership and business ownership

Is the value of a building therefore directly linked to the success of the business it houses ? Frequent confusion exists between real estate ownership and business ownership. The real estate ownership, in other words the building belonging to the landlord, provides facilities (or not) to generate margin. Obviously, the business operator also has a major responsibility in the creation of profit margin. His ability to attract customers, to transform footfall into sales, to manage his supply chain, his staff costs, etc. make the value of his goodwill. That is the business ownership, which belongs only to the business operator. Consequently we cannot imagine a valuation based only on the generated profit margin.

The method proposed in this book provides an approach to assess as objectively as possible a rental market value and a key money depending only on the real estate. If the business operator, by his talent, manages to generate more margin than the others, the benefit goes to his goodwill and thus should not influence the value of the real estate. The reverse is just as true.

Knowledge and know-how : the two legs of the expert appraiser

Real estate valuation is neither a science nor an art. If it were a science, a simple computer would have long since replaced appraisers. If it were an art, the appraiser’s creativity would have led him to transgress all barriers to achieve ever more daring results, de facto moving away from the reality of the market.

We prefer to see appraising as a complex work combining knowledge and know-how. Knowledge is the database side. The appraiser must be a keen observer of the market, stay informed of recent transactions, pile up significant amount of data key to his professional practice. Know-how is the creative and intellectual counterpart of the appraisal work. The appraiser must understand the main lines of force of a real estate market, gain height to keep the focus of offering a faithful image of the market value despite the infinity of possible variations of the comparables.

This book brings together guidelines and offers a series of best practices. It is not a scientific process to be followed strictly. As any cooking lover knows, the recipe must be adapted to the circumstances and the ingredients available. The proposed method does not replace the need for expertise and professionalism of the appraiser so that the final outcome is an authentic reflection of a market and not the result of blind computing.

Rental value appraising

We consider as only valid approach to assess a rental value, the one through comparables, sometimes also called market approach. This gives an indication of the value by comparing the real estate to be valued with identical or similar buildings for which price information is available. This is the most difficult approach because it requires an excellent knowledge of past transactions, commonly called comparables. But it is the only one which, in our opinion, gives a correct reflection of the rental value.

Beware : One has to understand the concept of comparable. A comparable is a transaction, almost always cast in a written contract, which gives an indication of the market value at a given time. A lease, a renewal, a sale, a lease assignment… can be a comparable. A building in itself is not a comparable. It is a transaction relating to it which is one. In the context of market rent appraisal, only transactions relating to rentals can be comparables : leases, renewals and lease assignments (provided that the amount paid for the assignment, the key money, relates only to the lease, not to the lease accompanied by the business).

Note : We are talking about valuation expertise here, not value opinion. Confusion is common in the public between the two. However, the work and the result are fundamentally different. The valuation expertise will objectively build its result on transactions, verifiable events, which give the market value : the comparables. Knowledge of the market is therefore key. The value opinion reflects the feeling of the expert. We could compare the expert opinion to a doctor making his diagnosis without examining you or making analyses. One quickly understands that the result is more random ! For the price, fortunately often limited, a value opinion certainly offers a nice piece of paper with a beautiful header, but not much defensible content.

To determine the rental value of the property and compare it wisely, we must take into account :

  • Market conditions
  • Location
  • Physical characteristics of the property

How to choose your comparables ? Let’s dream a little. In an ideal world (or almost), the comparables should :

  • Be part of a same market, a same catchment area
  • Reflect the market rental value
  • Be recent
  • Have an identical or similar physical configuration
  • House a similar business

We voluntarily number these criteria because we consider them hierarchical. The first is more important than the second and so on. For example, selecting a comparable in a different market will have major consequences on the assessed value, while mixing comparables related to different types of businesses will have significantly less consequences.

The book details the steps to select the relevant comparables and methods for weighting the surfaces that will lead to an objective assessment of the market value of a retail real estate in the city Center, a shopping Center or out of town.

Key money appraising

Key money is subject to much lust and sometimes disputes between landlords and tenants. It may be the subject of scandalous exclamations from outside observers. But there is one fundamental thing to keep in mind : key money is the most direct image of the market. It immediately shows the excess demand over supply and is highly volatile depending on economic conditions.

Key money is highly dependent on the legislation protecting the retail tenant. This legislation draws the line, not always clear if we limit ourselves to an economic approach, between land and commercial ownership.

The book analyses key money from the point of view of Belgian law and then details the steps to objectively assess its value in the context of an assignment. However, most principles can be extrapolated to other legal systems.

About the author

Grégoire Dupont
Grégoire Dupont


He is an expert in Belgium, an expert in the valuation of commercial real estate, a member of the Royal Institute of Chartered Surveyors (MRICS) and a member of the Belgian Chamber of Experts in charge of Judicial and Arbitration Missions (CEJA).

Trained as a commercial engineer, he first worked in IT and consultancy. In 2004, he took over Bureau Gerard, a Brussels broker specialising in commercial real estate, which he managed for 10 years. Today, he makes his valuation know-how available to the courts as a legal expert or to key players in commercial real estate as a technical advisor.