Have you ever had a commercial property valuation done and wondered how the valuer was able to come up with the final amount? The truth is there’s no single formula— professional valuers use different methods depending on your property type and its purpose.

With Australia’s commercial property market projected to grow at a compound annual growth rate of 8.6% from 2025 to 2034 (Claight, 2024), having a solid grasp of these methods can give you an edge in the market.

Let’s explore the best commercial property valuation methods and when to use each one.

Best Commercial Property Valuation Methods

If you’re looking to buy, sell, or assess a commercial property, these valuation approaches can help you make informed investment decisions and maximise your returns. Whether it’s an office building, a warehouse, or a shopping centre, different valuation methods work best for different property types and their purpose.

Let’s break down the common commercial property valuation methods and when to apply them.

1. The Income Approach: Best for rental/investment properties

Commercial properties are typically expected to generate revenue, so one of the most widely used commercial valuation methods is the Income (Capitalisation) Approach.

This method determines a property’s value based on its ability to generate income, making it ideal for rental properties like office suites, commercial buildings, shopping centres, and industrial premises.

How it works:

The formula for determining value is commonly: 

Property Value = Net Operating Income (NOI) ÷ Capitalisation Rate

• Net Operating Income (NOI) = Rental Income – Operating Expenses
• Capitalisation Rate = NOI ÷ Purchase Price

For example:

If you have a commercial building that generates $50,000 in annual rental income and has $10,000 in operating expenses, its NOI is $40,000.

Net Operating Income (NOI) = $50,000 – $10,000

NOI = $40,000

If similar properties in the area have been sold with the income calculated at say a 5% yield (capitalisation rate), the property value would be: $40,000 ÷ 5% = $800,000.

Property value = $40,000 ÷ 5%

Property value = $800,000

If you own or manage a rental property, the income approach provides a clear picture of its value based on future earnings potential. Generally, higher rental income and lower operating costs result in a higher property valuation. 

This method works best for office buildings, shopping centres, and other commercial properties with stable income streams.

2. Direct Comparison Approach: Best for market-based valuations

Also known as the Comparable Transactions Approach, this method determines a property’s value by comparing it to at least three recent sales of similar commercial or industrial properties in the same area. It takes into account factors such as:

• Location
• Size and condition
• Market trends
• Zoning regulations

To identify a property’s value using this approach, property valuers typically apply the following formula:

Property Value = (Adopted Price per Square Metre) x (Lettable Area)

If there have been many recent comparable sales in your area, especially in competitive markets, this method gives you a highly reliable and market-driven valuation for general commercial properties.

3. Cost Approach: Best for new or unique properties

The Cost Approach values a property by knowing how much it would cost to replace or rebuild it from scratch, minus depreciation. This method is particularly useful for unique developments where there are no other market transactions for the valuer to compare to such as custom-built industrial properties, and specialised facilities where comparable sales data is unavailable.

It involves identifying the cost of land, construction, and other costs related to the property and adding them all up, while deducting depreciation to consider the age or condition to come up with the total value.

Property Value = Land Value + (Construction Cost + Improvements – Depreciation)

This approach works best for properties where land and construction costs are well-documented, but there aren’t enough comparable sales to rely on.

4. Hypothetical Development Approach: Best for redevelopment projects or properties

If a property has redevelopment potential, the Hypothetical Development Approach is your go-to method to realise its highest and best use. This commercial valuation is ideal for vacant land with future development approval or potential or commercial sites with approved development plans.

Using the Residual Land Value (RLV) formula, you can determine the value of land based on its potential for development. This method helps investors and developers assess whether a project is financially feasible. There are limitations to this method which is quite subjective compared to the other methods analysed above.

Residual Land Value (RLV) = Net Realisation Value (NRV) – Developer’s Profit

How it works:

• First, estimate the final selling price of the completed development.
• Next, subtract all the costs involved like construction, agents and legal fees, holding and finance costs and more.
• Finally, deduct the developer’s expected profit and risk margin to determine the estimated land value.

This approach is commonly used for larger-scale commercial and industrial property valuations, especially when assessing land with future development potential.

Final Thoughts

Choosing the right commercial property valuation method depends on the type of property you’re considering, its income potential, and market conditions. For instance, if you’re valuing a rental property, the Income Approach is your best option, while for new or unique properties, the Cost Approach is the way to go.

At Independent Property Valuations (IPV), we have over 70 years of combined experience in commercial and industrial property valuations across Greater Sydney and New South Wales. Our expert property valuers provide accurate, independent valuations to help you determine your property’s best use and maximise your commercial real estate returns.

Are you looking for an expert commercial or industrial property valuation?

Contact us today for a detailed and customised assessment that’s tailored to your unique property needs.