Commercial, Industrial and Retail Valuation
Commercial, Industrial and Retail Valuation tests income-producing property: leases, net income, capitalisation and risk. The exam expects you to read a lease, identify recoveries and incentives, and apply evidence-based capitalisation rates.
Income mechanics
Start with gross potential rent, deduct vacancy and incentives, add recoverable outgoings if capitalising gross rent, or deduct non-recoverable outgoings if capitalising net rent. Check market rent reviews, fixed reviews, ratchets, demolition clauses, make-good obligations, tenant covenant and weighted lease expiry. Capitalisation rates reflect asset quality, location, lease term, tenant strength and market sentiment.
Worked example
A 1,000 m² retail unit has market rent of $350/m², outgoings of $80/m² fully recovered, vacancy allowance 5%, non-recoverable costs $10,000 and a capitalisation rate of 6.25%. Gross potential rent = $350,000. Vacancy = $17,500, so effective rent = $332,500. Deduct $10,000 = $322,500 net income. Value = $322,500 ÷ 0.0625 = $5,160,000. If the lease is short or the tenant is weak, the cap rate should rise; test the effect.
Traps
- Capitalising passing rent when it is above market.
- Ignoring rent-free periods and fit-out contributions.
- Double-counting outgoings.
- Using a cap rate from a different sector or date.
- Overlooking seismic rating and remediation capex.