Buying a cash flow: how a commercial property is actually valued

Warehouse and office property has a term that barely exists in residential: buying a cash flow. The idea is that what you acquire alongside the building is a long lease, and the payments under it are the owner's income.

Two forms of the transaction

• A completed property with a tenant. The lease is running, the rate is known, the term is known. The buyer acquires a predictable flow.
• A property under construction with a pre-let. The tenant is found in advance at the market rate at signing and moves in after handover. Void risk is removed before it arises.

Why this works in commercial and not in residential

It comes down to term. The average commercial lease in Dubai is three to five years. A residential contract is signed for one. That changes everything: with a commercial tenant you have an income forecast several years out; with a residential one you have twelve months and an annual risk of renegotiation.

Cap rate is the segment's main measure

The capitalisation rate is net operating income divided by the price of the property. Net operating income is rent less operating costs and property charges — what actually stays with the owner.

Unlike gross yield, a cap rate cannot be dressed up: it deducts costs before the calculation. That is exactly why commercial properties are compared on it rather than on the "rental yield" that listings compute off a gross rate.

What to check in the lease

• Who the tenant is and what their payment history looks like.
• Term and renewal mechanics — automatic renewal or fresh negotiation.
• Indexation: whether there is any, from which year, at what rate.
• Early termination conditions and the penalties for it.
• Who pays the service charge — the tenant or the owner.