Start with net income, not rent
The headline rent on a lease is rarely the number used. The valuer works to net market income: the sustainable rent the property would command in the current market, less any outgoings the landlord cannot recover.
Two adjustments do most of the work. First, passing rent versus market rent — a lease struck four years ago may be well above or below what the space would let for today, and the valuation has to account for the reversion. Second, incentives — rent-free periods and fitout contributions are amortised over the lease term, because a tenant paying $300 per square metre after six months rent free is not paying $300 per square metre.
The capitalisation rate
The capitalisation rate is the yield the market requires for an asset of this type, location and risk. It is derived from comparable investment sales — analysed sales of tenanted property — not chosen from a range.
Value is then net income divided by the capitalisation rate. The arithmetic is simple; the judgement is entirely in the rate. A 25-basis-point movement on a $2 million asset is roughly $80,000, which is why a defensible report shows the comparable investment sales the rate was derived from and how each was adjusted.
Why the tenant is the asset
Investors buying tenanted property are buying an income stream, and the reliability of that stream depends on who is paying it and for how long. A national retailer on a ten-year lease with fixed increases supports a much tighter yield than a two-year lease to a new local operator, in the same building.
The metric that summarises this is WALE — weighted average lease expiry — the average remaining term across tenancies, weighted by income. A long WALE with strong covenants is a defensive asset. A short WALE means near-term releasing risk, vacancy, incentives and capital expenditure, and the valuation prices that in.
Discounted cash flow
For larger or more complex assets, income capitalisation is supplemented with a discounted cash flow. The valuer projects income and expenditure over a defined horizon — typically ten years — including lease expiries, releasing assumptions, incentives, capital works and a terminal value, then discounts it back to present value.
DCF is where an asset's specific timeline becomes visible. Two properties with identical current income but different expiry profiles look the same under capitalisation and quite different under DCF. For development sites, the equivalent tool is a residual land value calculation working back from end value less costs and profit.
Direct comparison and land rate
Income methods are cross-checked against direct evidence: rate per square metre of lettable area for built assets, and rate per square metre of site area for land and industrial holdings. Where the two approaches diverge materially, the valuer has to explain why — often the answer is that one comparable set is thin.
For vacant or owner-occupied property, direct comparison may lead the assessment, with a notional market rent capitalisation used as a check. Which approach leads depends on the asset and on where the better evidence sits.
What delays a commercial valuation
Rarely the inspection. Almost always the paperwork. A tenancy schedule that does not reconcile to the leases, missing lease variations, outgoings statements that stop two years ago, or undocumented capital works all require chasing before the analysis can be finalised.
Assembling a complete document pack before instructing is the single most effective thing an owner can do to compress turnaround. With everything in hand, three to seven business days is realistic. Without it, that clock does not start.
Leases & variations
Every executed lease and every amendment, including side deeds and rent-free arrangements.
Tenancy schedule
Areas, terms, commencement and expiry dates, options, review structure and current rents.
Outgoings
Statements for the last two to three years and the current budget, plus what is recoverable.
Capital works
Recent works completed and anything committed but not yet done.
Plans & areas
Building plans and, where available, a survey of lettable areas.