A capitalisation rate is a compact idea. Take a building’s net income, divide by a market yield, and you have a value. Discounted cash flow adds time: project income and costs, discount them, add an exit value. Both methods are sensible ways to price an income stream.
Neither is designed to see a roof. Physical condition enters these models indirectly, through rent, vacancy, a general allowance or a deduction for known works. The building itself is mostly invisible.
Where capital hides in a valuation
Future capital needs enter valuations in a few ways. A deduction for known immediate works, often taken from a due diligence report. A general allowance in a cash flow, sometimes expressed per square metre or as a share of income. An adjustment to the yield to reflect a building’s age or grade. Each is a reasonable shortcut. None is a reading of what the building will actually need.
Two buildings with the same income, tenants and location can therefore be valued similarly while one faces a heavy programme of plant, facade and compliance works and the other does not.
The valuation says what the income is worth. The capital plan says what it will cost to keep earning it. Investors need both.
What the valuation standards now ask
Valuation standards have been moving toward the building. The International Valuation Standards and the RICS Red Book Global Standards that incorporate them both took effect in their current editions on 31 January 2025. The Red Book edition added material on environmental, social and governance factors and on modelling, and valuers are expected to consider how such factors, including the physical characteristics of the asset, affect value.
What the standards do not do is supply the building evidence. A valuer can only reflect the capital position that is known to them, and in most valuations that evidence is a general allowance or a figure lifted from a due diligence report prepared for another purpose.
| Method | What it captures | What it tends to miss |
|---|---|---|
| Deduction for immediate works | Known near-term costs from a report | Anything beyond the report’s horizon or scope |
| General capital allowance in a cash flow | A smoothed annual cost, often a share of income | Concentration: a roof or facade falling due in one year |
| Adjusted yield | The market’s view of risk in the asset class | The specific condition of this building |
| Building-specific programme | Timing, size and uncertainty of each major item | Little, if the evidence is current |
Moyne Ross summary of common practice; valuation method varies by valuer, market and purpose.
A worked comparison
Two neighbouring offices each produce two million dollars of net income on similar leases and are valued at a similar yield. The first had its central plant, roof and lifts renewed six years ago; its ten-year capital requirement is modest and falls mostly late in the decade. The second has original plant, a membrane at the end of its life and lifts due for modernisation; its ten-year requirement is several million dollars, mostly in years two to five.
A buyer pricing both on income and a general allowance pays nearly the same for each. A buyer who reads both registers sees that the present value of the second building’s programme is a material share of its price, and either negotiates or walks. The valuation was not wrong. It answered a different question.
The acquisition moment
The gap matters most at acquisition. A buyer who prices a building on income and a general allowance, then discovers a large capital requirement after settlement, has overpaid by roughly the present value of the difference. A seller whose building has a lighter programme than its age suggests may be underpaid unless that is demonstrated.
This is why technical due diligence exists, and why its quality matters. The approaches in Australia, Britain and the United States differ, as Due Diligence Across Three Markets sets out, but each aims to bring physical condition into the price.
A second number
We think every investment decision on a commercial building benefits from a second number beside the valuation: a ten-year capital requirement, built element by element, split by horizon, with its cost basis and confidence visible. The two numbers answer different questions. Together they give a far better picture of value than either alone.
The Melbourne office study is an example. Its ten-year capital requirement, set beside its approved development pathway, changed the question from refurbishment to redevelopment. The valuation alone would not have shown that.
Reading condition into value
Anyone relying on a valuation can ask how capital enters it, and whether that reflects the building or a generic assumption. Across a portfolio, buildings with similar yields may sit at very different points in their physical lives, and only the second number shows it.
Sources
Named sources consulted for this paper. Consequential claims link to their source in the text. Reviewed 3 November 2026; next review by 3 November 2027.
- RICS Valuation, Global Standards (Red Book), RICS. Accessed 3 November 2026.
- Royal Institution of Chartered Surveyors, RICS. Accessed 3 November 2026.
- RICS Valuation: Global Standards (incorporating IVS), RICS. Accessed 3 November 2026.
Questions
Do property valuations include future capital expenditure?
Usually in a general way, through deductions for known works, allowances in cash flows or yield adjustments. They rarely reflect an element-by-element view of what the building will need.
Why compare a valuation with a ten-year capital requirement?
The valuation prices the income; the capital requirement shows what it will cost to keep that income. Two buildings with similar values can carry very different capital needs.