ALWAYS CLICK ‘SAVE & CONTINUE’ AS YOU INPUT DATA INTO THE REQUIRED FIELDS – THE TAB IS AT THE BOTTOM OF EACH SECTION
Capitalisation Rates
Place yourself in a position whereby you can look through an objective lens and rationalise the strengths, the weaknesses and the future prospects of your pharmacy
Remember, the higher the Cap Rate, the lower the end value. Low Cap Rates mean a higher end value, and generally reflect well performed pharmacies, or a premium is being sought.
This is where you will factor in considerations such as:
- Past performances and future prospects/trends;
- Rent considerations, both length of term available and what this expense represents as a percentage of Sales;
- Condition of the pharmacy/latest refit;
- Competition;
- Demographics;
- Access and proximity to revenue and foot traffic drivers such as supermarkets and/or doctors;
- Visibility, ease of parking, convenience for customers;
- Unique qualities/services available in your pharmacy;
- Desirability and the depth of Buyers for your type/style of pharmacy; and
- There will also be state influences and trends as well as regional/remote influences and trends that will be factors for consideration.
Choose the lowest Capitalisation Rate that best represents the most realistic Value assignable to your pharmacy. Remember, if you go to the market you will need to justify your approach.
An Example – points to consider…
My Pharmacy Appraisal was requested to provide commentary regarding how a Cap Rate was determined during a dispute. Details and the actual rates shown here have been altered, but the process in determining an end figure – and thus risk weighting the pharmacy – provides a good example of how to reach a reasonable conclusion. This example is from a real transaction.
- A regional pharmacy where previous Cap Rate sales have been around the 18% to 20% marks.
- Why were Cap Rates at this level? The area is affected but cyclical factors, the economy can sometimes be difficult and recent economic activity has been impacted by a downturn in a strong driving industry.
- The area can be hard to entice a deep choice in staff and so local pharmacies can take longer to sell and could be considered harder to sell – thus leading to a higher Cap Rate.
- The pharmacy is the only pharmacy in a strong community shopping centre – thus this is a positive influence (and thus reducing the Cap Rate).
- The pharmacy is co-located with a medical centre – a positive influence.
- It is also located with a major supermarket – positive influence.
- There is good access, parking and prominent signage – positive influence.
- There are historically strong Gross Profit margins – positive influence.
- The pharmacy has been well run in terms of Salaries & Wages to Sales (and Gross Profits) – positive influence.
- Rent-to-Sales is very low – a very positive influence.
- The GLA (Gross Lettable Area) or size of the pharmacy is very large – a negative influence – although this negativity is significantly off-set by the Rent-to-Sales ratio.
- Sales per sqm – neutral, because the pharmacy is achieving reasonably good figures despite operating across a very large footprint (GLA).
- Tenure/Lease was uncertain – quite negative. A Buyer is acquiring Turnover and Tenure and thus uncertainty around a future lease or indeed lease negotiations, or any hint a favourable rental position could be removed or lessened would be detrimental.
- A big dollar transaction – negative. A limited market, or a very small pool of Buyers exists, for a large dollar transaction.
- When all was considered, the Cap Rate determined wasn’t too far removed from the original central starting point and thus risk weighting and so landed at 19% (original starting point 18% to 20%).
- There were several factors that would excite a Buyer, but just importantly, there were several factors that would need significant ongoing attention to ensure ongoing future earnings and value.
