How to Value a Commercial Property: Cap Rates, NOI & DCF Explained

Commercial real estate has always played by a different set of rules. While residential buyers often chase location and emotion, commercial investors look at yield, performance, and long-term value creation. 

Before you buy, sell, or lease out a commercial asset, you need to know one thing: how much it’s actually worth. Not on paper. Not based on what someone else paid nearby. But based on what it earns, what it costs to operate, and how those numbers hold up over time.

Understanding how to evaluate an asset, through its operating income, capitalisation rate, and future cash flows, is what separates a speculative move from a strategic one. Knowing the math is part of it. Knowing when and how to apply it is what builds conviction.

What makes commercial valuation different?

Unlike residential valuation, which often relies on emotional or comparative pricing, commercial property valuation is rooted in income generation. It is not about what the property looks like or who lives next door. It is about what the asset can deliver financially and how predictable those earnings are.

This income-centric approach forms the foundation of three widely used valuation methods:

• Income Capitalisation (Cap Rate)
• Net Operating Income (NOI) analysis
• Discounted Cash Flow (DCF) projection

Let’s take a closer look at each, along with how and when they are used.

Where Do You See These Numbers in Practice?

Commercial valuation may sound like an exercise reserved for analysts, but the data behind it is increasingly accessible. Publicly listed REITs in India, such as Brookfield India REIT and others, regularly publish detailed financials that include asset-wise NOI, occupancy rates, and cap rate assumptions across their portfolio. These figures are disclosed in quarterly investor presentations and annual reports, all of which are available on their websites.
For individual investors or potential buyers, this makes it easier to understand how the asset performs operationally, how it is being valued by professionals, and how those valuations evolve over time.

Starting with Net Operating Income (NOI)

Most commercial valuations begin with a clear NOI calculation. This figure reflects earnings after subtracting operating costs, giving a more accurate view than topline rental income.

A typical process looks like this:

1. Calculate Gross Income
   Includes base rent, parking charges, maintenance recoveries, and other recurring income.
2. Apply a Vacancy Factor
   A typical buffer—say, 5–10%—can be applied depending on local vacancy trends or historic data.
3. Deduct Operating Expenses
   Covering taxes, insurance, common area maintenance, utilities, and property management costs.
4. The result: NOI
   This number feeds into Cap Rate and DCF models as the base income driver.

Using the Capitalisation Rate (Cap Rate)

Cap Rate helps investors understand the return they can expect on an asset, assuming no debt is used. It’s expressed as:

Cap Rate = NOI / Market Value

Let’s say a leased commercial space earns ?36 lakh per year and is valued at ?6 crore:

Cap Rate = 36,00,000 / 6,00,00,000 = 6%

This provides a yield benchmark for investors. If you know the typical Cap Rate for that market—say, 7.5%—you can reverse the equation to estimate a property’s value:

Value = NOI / Cap Rate

So, if the NOI is ?50 lakh, the indicative value becomes approximately ?6.66 crore.

Cap Rates often vary by city, asset type, tenant profile, and infrastructure access. For instance, a premium IT park in Bengaluru may show a lower Cap Rate than a standalone retail space in a Tier 2 city.

Looking ahead with Discounted Cash Flow (DCF)

Cap Rate shows a snapshot. DCF goes further, projecting how the asset performs year after year.

This method estimates future cash flows over a given term—usually 10 years—and discounts them to present value using a rate that reflects perceived risk.

Key components include:

• Projected NOI (factoring lease escalations or renewals)
• Expected CapEx (like tenant fit-outs or system upgrades)
• Terminal value (typically based on an exit Cap Rate)
• Discount rate (which can range between 10–14% depending on asset type, location, and stability)

For example, a stable Grade A office with long-term leases might use a discount rate closer to 10%. A smaller commercial asset with high tenant turnover could see a higher rate.

DCF helps evaluate not just what the asset is worth today—but how it’s likely to perform over time.

When to use market comparisons

In cases where rental data is limited—such as strata-sold units or new developments—investors may use comparable sales. This involves analysing similar properties and adjusting for factors like:

• Floor level or visibility
• Age and condition
• Lease length and occupancy
• Frontage or accessibility

While ?/sq ft is a familiar benchmark, it can mislead. For example, two offices in the same building may have very different valuations if one is leased to a blue-chip tenant and the other is vacant. That’s why income data, when available, typically carries more weight.

What else shapes commercial property value?

Real estate doesn’t exist in isolation. Infrastructure, tenant mix, and asset positioning all influence valuation outcomes.

Here are some contextual examples:

• An office located next to a metro line might attract a tighter Cap Rate due to stronger demand.
• A warehouse near a port or along a freight corridor may offer stable absorption and lower vacancy risk.
• A building with tenants across sectors is likely to fare better during market shifts than one with a single large lessee.

Lease terms, escalation clauses, tenant creditworthiness, and lock-in periods also play a role in shaping risk perception and thus valuation assumptions.

Watchpoints during valuation

Even experienced investors benefit from cross-checking their assumptions. Some common issues that can distort value include:

• Assuming high rent without verifying local benchmarks
• Overlooking future maintenance or CapEx
• Ignoring lease expiry or rollover risk
• Assuming resale ease without evaluating local demand

Running multiple scenarios, stress testing assumptions, and layering in market insights can help create a more accurate view.

Where REIT Investors Should Pay Closer Attention

When you invest in a Real Estate Investment Trust (REIT), you may not be valuing an individual asset, but you are still relying on the same valuation principles. The REIT’s Net Asset Value (NAV) is influenced by the combined valuation of its portfolio, using methods like DCF and Cap Rate across leased office assets.

As a REIT investor, it helps to track:

• The weighted average Cap Rate across the REIT’s portfolio
• The nature of lease agreements and occupancy trends
• Asset-level NOI contribution
• Planned infrastructure or capital investments

All of this impacts both the asset performance and the unit price of the REIT over time. Understanding property valuation techniques makes you a more informed REIT investor, especially when reviewing quarterly disclosures or evaluating long-term yield.

Valuation Is a Strategic Exercise, Not a Checklist

Ultimately, valuing a commercial property is about reading between the lines. The numbers are essential, but context gives them meaning. Knowing when to apply a DCF versus a Cap Rate, understanding local absorption trends, or factoring in policy shifts, these are all part of the strategy.

Whether you are evaluating a standalone asset or investing via a REIT, commercial property valuation is not a one-size-fits-all process. It is a layered analysis of income, risk, and potential.

The more precise your understanding, the clearer your decisions become.