Two ways: How to calculate commercial property valuation

Stepping into commercial real estate? Then understanding how to value a property isn’t just helpful, it’s non-negotiable. Why, you might ask? Well, valuation impacts nearly every decision you make as an investor, from buying and financing to leasing and selling. It helps you assess risk, compare opportunities, and strategise with ease and confidence. But here’s the catch: commercial properties don’t have a set price tag. Their value is influenced by income potential, market trends, and comparable assets. 

So how do you know if you’re looking at a great deal or making a costly mistake? 

Don’t worry, we’ll help you figure it out. 

In this blog, we’ll walk you through the two most trusted methods of commercial property valuation used widely across Australia. 

Why commercial property valuation matters for Investors

Let’s be honest: commercial real estate investing isn’t just about signing a contract and watching the dollars roll in. If only it were that simple. To make smart, profitable decisions, you need to understand what a commercial property is actually worth. That’s where commercial property valuation comes in. It helps investors like you avoid overpaying, undercharging rent, or missing out on the capital gains a property could offer. It also plays a major role in negotiating deals, securing finance, and forecasting returns. 

It doesn’t matter if you’re looking to purchase a commercial property, refinance your loan, or just want to expand your portfolio, knowing the value of a property through the right valuation methods is important for all. 

1. Income approach: NOI ÷ cap rate

Also known as the capitalisation rate method, this approach is all about how much income the property generates. Investors often use this method to answer the million-dollar question (quite literally): How much cash will this property actually put in my pocket? 

What is Net Operating Income (NOI)?

NOI is your annual rental income after subtracting all operating expenses (like maintenance, insurance, property management, and council rates) but before you deduct loan repayments and taxes. It tells you how much profit the property earns purely from operations. 

NOI calculation Example:

Gross rental income: $120,000

Operating expenses: $30,000

NOI = $90,000

Simply put, NOI is your property’s financial heartbeat. The more consistent and healthy it is, the more valuable the property. 

How to find a cap rate for your Aussie market

The capitalisation rate (cap rate) indicates the expected rate of return on a property based on income. In Australia, cap rates vary depending on location, demand, asset class, and economic conditions. 

For instance, prime retail spots or office spaces in Sydney might have a cap rate of around 4-5%, whereas industrial warehouses in Queensland could be closer to 6-7%. 

Now, here’s the thing: cap rates also tell you how risky an investment might be. Lower cap rate? Less risk, but you’ll probably pay more. Higher cap rate? More risk, but potentially higher returns. 

InvestorKit Tip: Always check local sales data or consult a commercial property value estimator or an experienced buyer’s agent to get a reliable cap rate for your market. 

Cap rate calculation example

Moving on, let’s plug the numbers in: 

NOI = $90,000

Cap rate = 6%

Commercial property valuation = $90,000/0.06 = $15,00,000 

This method works well when you’re comparing multiple income-producing assets, especially in locations where rental returns are relatively stable. It’s also one of the most commonly used commercial valuation methods when income performance is clear and consistent.

Benefits & pitfalls for investors

Benefits:

• Simple and based on actual performance.
• Ideal for properties with a steady rental income (like retail, office, industrial).
• Helps you compare returns across multiple assets. 

Pitfalls:

• Relies heavily on accurate NOI and local cap rate data.
• Doesn’t capture future growth potential. 
• Might overlook unique factors such as lease expiry, tenancy risk, or zoning changes. 

2. Sales comparison method: Market parallels

The sales comparison approach (also called the direct comparison method) is pretty straightforward: you look at how much similar properties have sold for recently and use that to estimate your own property’s value. It’s a go-to for valuers and investors alike because it reflects the real market sentiments.

Identifying true ‘comparables’ in Australia

Not every “sort-of similar” property will give you a clear picture. What you’re looking for are recent sales (ideally within the last 6-12 months) of properties that match yours in:

• Property type (example: industrial vs retail)
• Zoning
• Lease profile
• General condition
• Size and layout

Lenders and valuers love this method when there are plenty of recent sales to go by. But if you’re in a niche market or a slower-moving area, you might need to combine this with other valuation methods to get the full picture. 

Adjusting for size, location, and age

Once you’ve found a few comparable properties, it’s time to adjust for the differences, because no two properties are exactly alike. You’ll often find:

• Size differences (price per sqm usually drops as size increases)
• Location premium (CBD vs fringe suburbs)
• Age/condition (newer or freshly renovated buildings tend to fetch more)

For instance: If one of your comparables is closer to a major road or was built more recently, you’d need to adjust your estimate slightly down. Things like renovation, access to parking, or proximity to transport hubs can also impact commercial property value. 

Price-per-square-metre formula & example

Here’s a simple example based on three recent sales: 

• Property A: 1,000 sqm sold for $2.2 million = $2,200/sqm
• Property B: 900 sqm sold for $1.89 million = $2,100/sqm
• Property C: 1,050 sqm sold for $2.1 million = $2,000/sqm

Average: ($2,200+$2,100+$2,000)/3 =$2,100/sqm

If your target property is 1,000 sqm, the estimated commercial property value = 1,000 sqm x $2,100 = $2.1 million

This type of commercial real estate valuation is especially helpful when you have recent, comparable sales and a stable market to work with.

Benefits & pitfalls for investors

Benefits: 

• Reflects true market behaviour.
• Useful when there are multiple, recent, comparable sales.
• Commonly accepted by lenders and valuers.

Pitfalls:

• Hard to apply in regional or slow markets with limited sales data.
• Adjustments can be subjective.
• Doesn’t account for income potential or future upside.

Should you also consider… other valuation methods?

Absolutely. While the two methods above are the gold standard, there are a few other ways to figure out a property’s value, especially if you’re dealing with a one-of-a-kind site or a property that’s still under development. 

Cost approach – replacement vs depreciation

This method is simple: what would it cost to rebuild the property today from the ground up? You add the construction and materials costs, then subtract wear and tear (aka depreciation). What you’re left with is a good estimate of what the building is worth. 

When does it help? If the property hasn’t started generating income yet, like a brand-new warehouse or a custom facility. This can help you gauge its replacement cost or insured value. 

Gross Rent Multiplier (GRM) – quick screening

GRM is a quick way to get a ballpark value:

GRM = Purchase price/Gross Annual Rent

Let’s assume a property sells for $1 million and brings in $100,000 a year in rent. That gives you a GRM of 10. 

It’s a good screening tool when you’re comparing multiple properties quickly, but remember: it doesn’t factor in expenses so don’t use it as your final number. 

Discounted Cash Flow (DCF) & AVMs – advanced options 

Discounted Cash Flow (DCF) is the long-game approach. You estimate how much rental income the property will generate over 5-10 years, then figure out what all the future cash is worth in today’s dollars. It’s detailed, data-heavy, and best suited for large commercial assets with stable, long-term leases. 

Automated Valuation Models (AVMs) are the tech-driven version of a quick guess. These tools pull market trends and recent sales data to instantly generate a property value. They’re handy for a quick check, but they can miss property-specific factors, like zoning nuances, a hidden renovation, or unusual lease terms. 

Bottomline: These methods aren’t always required, but they can give you a better idea when things get a bit more complex.

Conclusion 

When it comes to commercial property valuation, there’s no one “right” way, but the income approach and sales comparison method are your two best starting points. They give you the confidence to negotiate, strategise, and grow your portfolio with clarity. 

And remember: while spreadsheets and formulas are powerful, it’s your strategy that brings them to life. So, partnering with a data-driven buyer’s agent like InvestorKit means you’re not just estimating value, you’re building wealth. 

If you want to learn how to invest in property or move forward in your commercial real estate investing journey, we’re here to guide you every step of the way.

Invest in commercial property now.

References:

[1] – Futurerent.com.au – Cap rate in commercial real estate explained

[2] – Kpmg.com – KPMG Commercial Property Market Update, July 2024 (PDF)

[3] – Brisbanepropertyvaluations.com.au – A guide to valuing commercial property

[4] – Propertynow.com.au – About PropertyNow and its services

[5] – Melbournevaluers.net.au – How to value a commercial property