Commercial Property Valuation Calculator
The primary lens for commercial property analysis. Determine what a property is worth based on its income, or reverse-engineer the yield from a market price.
Inputs
Annual rent minus all non-recoverable outgoings
Valuation Result
Based on market capitalisation method
Investor Strategy Tip
In commercial real estate, a lower "Cap Rate" implies higher market confidence (or lower risk), resulting in a higher property value for the same income. Prime assets (Blue Chip) often trade at 4-5% yields, while regional or secondary assets might trade at 7-9%.
Understanding the Capitalisation Method
The Capitalisation Rate (Cap Rate) is the ratio between the net operating income produced by an asset and its current market value. It is essentially the "yield" you would receive on a property if you paid for it entirely in cash.
Valuation in commercial real estate is almost purely mathematical: if the market believes the fair yield for a certain asset class is 6.0%, and a building generates $60,000 in net rent, it is worth exactly $1,000,000 ($60,000 ÷ 0.06).
The Core Valuation Formulas
To Find Property Value
Value = Net Income ÷ Cap Rate
To Find Implied Yield
Yield = Net Income ÷ Price × 100
Key Factors Influencing Cap Rates
Tenant Quality
Long leases (5-10 years) to government or ASX-listed tenants command lower cap rates and higher valuations.
Location Risk
Prime CBD and major hub locations are more liquid and lower risk, leading to 'sharper' (lower) cap rates.
Lease Structure
Net leases (where tenants pay all outgoings) are more attractive than gross leases and typically value higher.
Interest Rates
As interest rates rise, investors typically demand higher cap rates to maintain a spread over the 'risk-free' rate.
Building Grade
A-grade or new builds require less capital expenditure (CapEx), making them more valuable per dollar of rent.
Future Uplift
Properties with under-market rent or development potential may sell at a lower yield based on future expectations.
How to value a commercial property with a cap rate
Commercial property is valued mainly on the income it produces. A valuer takes the property's net income (rent after the outgoings the landlord pays and an allowance for vacancy) and divides it by a capitalisation rate drawn from recent sales of similar properties.
Because the cap rate sits underneath the income, small changes move the value a lot. That's why buyers and valuers argue over a quarter of a percent, and why the same building can be worth very different amounts as interest rates change.
Worked example: an office suite earning $85,000 a year
A strata office suite is leased with a net income of $85,000 a year. Comparable sales nearby show cap rates of around 6.25%. The vendor is asking $1,450,000.
- Net income
- $85,000
- Cap rate from comparable sales
- 6.25%
- Value = $85,000 ÷ 0.0625
- $1,360,000
- If cap rates sharpen to 5.75%
- $1,478,261
- If cap rates soften to 6.75%
- $1,259,259
- Yield at the $1,450,000 asking price
- 5.86%
- Value at a 6.25% cap rate
- $1,360,000
A half-percent move either way changes the value by at least $100,741. At the asking price the buyer would accept a 5.86% yield, sharper than the market evidence, so the price looks high unless the lease or location justifies it.
Common mistakes
Using gross rent instead of net income
Cap rates are applied to net income. If the landlord pays rates, insurance or strata levies, deduct them first or the value will be overstated.
Ignoring lease incentives
A lease with a big rent-free period or fitout contribution has a lower effective rent than its face rent. Value on the effective figure.
Comparing against asking prices
Cap rates should come from settled sales, not listings. Asking yields are usually sharper than what properties actually sell for.
Treating residential gross yield as a cap rate
Residential yields are usually quoted before costs, so they are not comparable with commercial cap rates, which are net of outgoings.