Divide the net income by the market yield. Say a shop earns A$200,000 a year after costs. Similar shops are selling on a 6.5 per cent yield. The shop is worth about A$3,077,000.
That is the whole sum. It takes ten seconds.
So why do valuations still get argued over? Because neither number is a fact you can look up — one is buried in a lease, the other in past sales — and a small change in either moves the price by hundreds of thousands of dollars.
The useful part is not the formula. It is where those two numbers come from.
How commercial property value is calculated — and what moves it
This is the income method, or income capitalisation, and it prices a building as a stream of rent rather than as bricks.
Value = net income ÷ yield.
Net income is the rent left after costs you cannot bill to the tenant, and the yield is the return that similar buildings have actually sold on.
Now hold the rent still. Move only the yield. The same building takes a different price.
Two things fall out of that table. First, the yield does more work than the rent. So an argument about a quarter of a point is an argument about real money. Second, a price quoted without the yield behind it is not a valuation. It is just a number.
Where the income figure goes wrong
Four traps sit between the rent on the brochure and the rent you bank.
Gross rent is not net income
A lease called "net" is not always net. Read who pays land tax, council rates, insurance, management and structural repairs. In a building with several tenants, read who pays for the empty suite.
In Victoria, land tax cannot be passed to a retail tenant at all — that is the Retail Leases Act 2003 (Vic) — so a "net" figure that assumes otherwise is wrong from the first day you own the place.
Every dollar you cannot claim back comes off the rent first. At a 6.5 per cent yield, each A$1,000 you miss costs you about A$15,400 of value.
Face rent is not effective rent
This is the expensive one. Incentives are normal — rent-free months, a fitout paid for — and they almost never show up in the headline rent.
Take a tenant paying A$220,000 on a five-year lease who was given twelve months rent-free. Across the term they really pay about A$176,000 a year.
Rent above market is a countdown, not an income
An over-rented tenancy pays more than the space is worth today. It prices beautifully. Then it ends, the rent drops to market, and the value drops with it. Which is why the expiry date belongs in the valuation just as much as the rent does.
The covenant behind the rent
Rent is only as good as the company that owes it. The brand on the door and the name on the lease are often not the same, and a famous sign backed by a two-dollar shelf company is not the income you think you bought. Our due diligence guide covers these checks in full.
Where the yield goes wrong
You do not choose the yield. You do not read it off a market report. You take it from buildings that have actually sold.
Settled sales only. Not asking prices. Not campaigns that were pulled.
Each sale has to be a fair match — same type of asset, same sort of location, similar lease term left, similar tenant. Moving from a sale with eight years of term to a building with eight months is not a rounding exercise — it is the whole job.
One trap is worth naming, because it turns up in real feasibility studies. Someone takes the asking price, divides it by the rent, calls the answer the yield, and then applies that same yield straight back to the same rent.
That proves nothing — it restates the asking price with extra steps, and the evidence has to come from outside the deal you are testing.
When the income method is the wrong tool
The income method prices a building on what it earns today, which is right for a tenanted building with steady rent and wrong almost everywhere else.
| What you are holding | Primary method | Why the income method misleads |
|---|---|---|
| Stabilised, tenanted asset | Income capitalisation | Nothing — this is its home ground |
| Vacant or owner-occupied | Direct comparison of settled sales | There is no income to capitalise; a notional market rent imports an assumption as if it were a fact |
| Development or repositioning site | Residual land value — end value less delivery cost and the profit the risk demands | Today's income is the thing you are buying in order to change |
| Short lease tail or single tenant leaving | Income capitalisation, plus explicit re-letting allowances | Passing income prices in a certainty that expires on a known date |
This is why Axis names the deal before pricing it. Test a property against the wrong model and you get a confident answer to a question nobody asked.
We published a real case of exactly that. The screen came back red — not because the plan was poor, but because the deal had been described as something it was not. Naming the deal against the nine archetypes decides which method applies.
What this method cannot do
It cannot certify anything. This is a sum any owner, agent or buyer can do. Doing it is not a valuation.
A valuation is the signed opinion of a certified practising valuer — it carries their liability, and it is the number a lender will accept.
The method also does not test title, zoning, building condition, or what the lease means in law. This is decision support. It is not formal financial, legal, tax or planning advice.
Frequently asked questions
Longer answers live on our FAQ page.
What is my commercial property worth?
If it is leased, start with the sum above. Net income divided by the yield that settled sales support. That gives you a range to argue from, not a figure to bank on. The answer moves with the lease term, the incentives, and the company behind the rent. For a number a lender will accept, hire a certified practising valuer.
What is a good yield on commercial property in Australia?
There is no national number worth quoting. The yield is not a target you pick. It is what similar buildings actually sold for. Two shops on the same street can sell at different yields, because one has a national tenant on a ten-year lease and the other has a local operator with eighteen months left. Ask which settled sales support the yield being used, then read those sales yourself.
How do I work out net operating income on a commercial property?
Start with the rent payable under the signed lease, not the tenancy schedule. Take off every cost you cannot bill to the tenant, which usually means land tax and often management, insurance or structural repairs as well. Allow for empty space if the lease is short or the tenant is unproven. What is left is the income you are really buying.
Is income capitalisation the same as a formal valuation?
No. The income method is one approach among several, and anyone can run the sum. A formal valuation is a certified practising valuer's signed opinion, prepared to a professional standard and carrying their liability. Use the sum to decide whether a deal is worth chasing. Pay for a valuation when the decision turns on the number itself.
Can I value a commercial property myself?
Well enough to decide whether to keep going, yes. The income method is arithmetic: net income divided by a yield the settled sales support. Running it yourself is the fastest way to see whether an asking price is defensible.
What your own sum is not is a formal valuation. That is a certified practising valuer's signed opinion, prepared to a professional standard and carrying their liability — which is why a lender, a court or a partner will generally want one rather than your spreadsheet. Do the sum to make your own decision. Commission the valuation when someone else's decision turns on the number.
What is the difference between a cap rate and a yield?
In Australian practice the two terms are used for much the same idea: income expressed as a percentage of price. The distinction worth your attention is not the label but which income sits on top of the sum.
A percentage calculated on gross rent and one calculated on net income are different numbers from the same building. One calculated on face rent, before incentives are stripped out, is different again. So before you compare two yields, confirm both were built from the same income line. Two figures that look some way apart can be describing the same asset on different terms.
Why is my commercial property worth less than I expected?
Three things are worth separating before you argue with anyone, though they are not the only possibilities.
The income may be lower than the headline suggests, once incentives and the outgoings you cannot recover come out. The lease may be short, or carry an option that limits what a buyer can do with the asset after settlement. Or the sales you have in mind as comparables may have settled on terms yours would not attract.
If the gap is still there after all three have been checked, the question has stopped being a valuation question. It has become a diagnosis, and our guide to diagnosing an underperforming commercial property separates the causes.
Does a vacant commercial property have a value?
Yes — and the first thing to settle is which kind of vacancy you have. A building can sit empty while a lease is still on foot, with rent and outgoings still payable. In that case the income is intact and the usual sum applies, though the covenant behind that rent deserves a hard look.
Where there is no lease at all, the income method runs on a different footing. With no passing rent to capitalise, the sum works from evidenced market rent instead: what the space should let for, supported by comparable lettings, less an allowance for the time and cost of getting a tenant in. That is a weaker foundation than a signed lease, and buyers often price the difference. Comparable sales of unleased assets, and what the land supports under its zone, are the other two reads worth running alongside it.
Vacancy also carries cost while it lasts. Outgoings keep running with no tenant to share them, and land tax cannot be recovered from a tenant who does not exist. Value the position you can evidence, not the position you hope to reach.
Run the sum. Then spend your time on the two inputs — the lease that makes the income, and the sales that set the yield. Want that read done for you? An Axis Quick Scan tests a deal against its own claims, at a fixed A$49.95 or A$495, senior-reviewed before release. The wider sequence is in how to test a commercial property deal. Orders start on the intake page.
This guide is independent decision support — not financial, legal, tax or planning advice. A figure you would rely on belongs with a certified practising valuer, and lease interpretation with a property lawyer.