Valuing Commercial PropertyWhat Investors Look At

The Income Approach as the Standard

At its core, the net operating income (annual net rent excluding service charges minus non-recoverable operating costs) is capitalised with a factor that reflects location, property quality and risk. In simplified form:

Value ≈ net operating income ÷ capitalisation rate (Liegenschaftszins, or net initial yield)

A warehouse with €120,000 net operating income and a market net initial yield of 7% would therefore be worth around €1.7 million. At 6%, it would be €2 million: small differences in yield mean large differences in value.

The Leases

Tenant credit quality: A chain store with a good credit rating or a medical practice with a long track record is worth more than a young start-up.

Remaining lease term (WALT): The weighted average remaining term of the leases. The longer, the more predictable. Investors prefer at least five years.

Tenant mix: A property with many tenants from different sectors is less vulnerable than a single-tenant property.

Lease terms: Indexation, recovery of service charges, maintenance provisions ("roof and structure", Dach und Fach), renewal options, special termination rights.

Market rent: If the passing rent is well above the market rent, it may fall on re-letting (over-renting); if it is below, there is potential.

Property and Location

• Alternative use: Can the space easily be let to other users? Standard office space and logistics halls, yes; special-purpose properties (e.g. cold stores, production plants) less so.
• Condition and energy efficiency: Investors take into account future capital expenditure, ESG requirements and CO₂ costs.
• Macro-location: Economic strength, transport links (A9, A70, A72, A93), availability of skilled workers.
• Micro-location: Visibility, accessibility, parking, neighbourhood, footfall for retail space.

More on this under Location analysis & advice.

Typical Yields in Upper Franconia

Empirical values from our brokerage practice; in individual cases they depend on the tenant, the lease term and the condition of the property.

Owner-Occupied Commercial Property

If the owner uses the property themselves, a notional market rent is applied. Alternatively, a sale and leaseback can realise the value: the company sells and rents the property back. More on this in the guide Sale and leaseback.

Documents for the Valuation

Tenancy schedule with areas, rents and terms, all leases with addenda, service charge statements, floor plans and schedule of areas, building permits, energy performance certificate (Energieausweis), land register extract (Grundbuchauszug), maintenance history.

How the WALT Is Calculated

The WALT (weighted average lease term) weights the remaining term of each lease by its annual rent. Example: a commercial building in Hof with three tenants.

A WALT of just over five years is solid. The tax adviser's office with only one year remaining, however, is a risk that a buyer will price in. If a five-year extension is agreed before the sale, the WALT rises to 5.9 years, and the price usually rises with it.

Worked Example: Medical Centre in Kulmbach

If the market valued the same property at 7% instead of 6.25%, for example because the main practice has no successor, the value would be around €200,000 lower. That is why an assessment of the tenants' future belongs in every commercial valuation. You can find suitable properties and investors under Office and practice space and Investment strategies.

What Increases the Value Before a Sale

1. Extend leases: every additional month of term from a good tenant counts.
2. Let vacant space, even at a slightly lower rent. Let space is worth more than empty space with a hoped-for rent.
3. Put the contracts in order: collect all addenda, index adjustments and side agreements in a complete data room. For older commercial leases, check whether the statutory written form has been observed: formal defects can allow a buyer to terminate early and lower the price.
4. Settle service charges properly: open statements put buyers off.
5. Document the maintenance backlog rather than concealing it; buyers will find it in due diligence anyway.
6. Update the energy performance certificate and building data: institutional buyers ask for ESG metrics.

VAT: an Underestimated Issue

Many commercial landlords opted to charge VAT (Umsatzsteuer) when building or buying and had the input tax refunded. This matters when selling:

• If a let commercial property is sold as a whole together with the leases, this is often a transfer of a going concern (Geschäftsveräußerung im Ganzen). No VAT is then charged, and the buyer takes over the input tax position.
• If there is no transfer of a going concern and the sale is VAT-exempt, an input tax adjustment (§ 15a UStG) may become due within ten years of completion or purchase, potentially a six-figure sum.
• Alternatively, the purchase contract can opt for VAT; the buyer must then be entitled to deduct input tax themselves.

These questions should go to a tax adviser before the notary appointment. More under Tax aspects of commercial property.

The Buyer's Due Diligence

Professional buyers examine a commercial property in four areas:

Preparing these documents shortens the review by weeks and avoids renegotiation. A structured data room is part of our approach when selling commercial property.

Types of Commercial Property and Their Specifics

More on individual segments: Office and practice space, Retail and hospitality, Warehouse and industrial space.

Measuring Areas Correctly

Areas are a frequent source of dispute with commercial property. Lettable area, usable area and gross floor area are different measures. For office and retail space, the gif lettable area guideline (Mietflächenrichtlinie) has become established in Germany. If space is not measured consistently, rents per square metre are not comparable, and the income value can be calculated incorrectly. When selling or buying, check which method was used to determine the areas in the leases.

ESG and Energy: Increasingly a Price Factor

Institutional investors pay increasing attention to sustainability criteria in commercial property. The following play a role in value:

• Energy consumption and CO₂ emissions: they determine future costs and attractiveness to tenants.
• Type of heating: under the Building Energy Act (GEG), fossil-fuel heating systems will have to be replaced in the long term. → Heating law (GEG)
• Photovoltaics and charging infrastructure: by now a selection criterion for many tenants.
• Certifications: increasingly expected for larger properties.

For smaller commercial properties in Upper Franconia, these criteria are still less strict, but they are gaining in importance. Anyone investing today should factor them into their planning.

When the Owner Uses the Property

For owner-occupied business premises, the question of value often arises with business succession, financing or a planned move. The valuation is then based on a notional market rent: what would a third party pay for this space? A realistic market rent is also the basis for a sale and leaseback. → Sale and leaseback

Valuation in Business Succession

In a business succession, the question is often whether the business premises are handed over too, let to the successor or sold separately. A realistic valuation is the basis for all three routes. For the successor, paying rent instead of a purchase price can make financing easier, while the senior owner keeps the property as a source of income. → Sale and leaseback