What sale valuation metrics apply to build-to-suit assets in the target submarket?

Sale valuation metrics for build-to-suit (BTS) assets in a target submarket are based on a combination of income potential, lease structure, tenant profile, and local market dynamics. These metrics help buyers, especially institutional and high-net-worth investors, determine whether the BTS asset provides acceptable returns, risk-adjusted pricing, and resale potential.

1. Capitalization Rate (Cap Rate) Benchmarking

• Cap rates for BTS assets typically range between 7% to 9%, depending on tenant creditworthiness and lease duration.
  
• Prime submarkets with strong demand and anchor tenants may see cap rates as low as 6.5%, while peripheral or tier-2 locations may hover closer to 9%.
  
• The cap rate applied reflects local demand, vacancy rates, and comparable asset transactions.
  
• Buyers use the net operating income (NOI) from lease terms to calculate valuation as: Value = NOI / Cap Rate.
  
• Cap rates are also influenced by lease lock-in, escalation clauses, and the developer’s track record.
  

2. Price Per Square Foot or Square Meter

• Valuation also considers built-up area pricing, benchmarked against recent BTS transactions and pre-leased asset sales.
  
• In commercial submarkets, sale rates may range from ₹5,000 to ₹15,000 per sq ft, depending on use type (office, retail, warehouse) and amenities.
  
• Buyers assess pricing against the cost of replacement and prevailing rents per square foot.
  
• Build quality, floor plate efficiency, and infrastructure readiness impact this metric.
  
• Price per square foot is often used in tandem with cap rate to validate fair market value.
  

3. Lease-Backed Discounted Cash Flow (DCF)

• Institutional buyers may apply DCF modeling over a 7–10 year horizon to estimate the total value of rental income.
  
• This includes assumptions about:
  
  • Rent escalations (typically 5%–7% annually)
    
  • Terminal value at lease maturity
    
  • Discount rate aligned with buyer’s IRR expectations (usually 9%–12%)
    
• DCF is especially relevant for assets with structured lease contracts and fixed exit timelines.
  
• A strong lease profile with a predictable income stream raises DCF-based valuation.
  

4. Replacement Cost and Land Yield Assessment

• Buyers assess whether the sale price aligns with the cost of reconstructing the asset, including land, approvals, and construction.
  
• Valuation exceeding replacement cost is only justified by factors like tenant quality, location scarcity, or yield compression.
  
• Land yield is calculated as Net Rental Income / Land Cost, indicating whether land was used efficiently.
  
• A BTS asset offering 10% or higher land yield typically commands a higher market value.
  

5. Lease Structure and Tenant Strength Premium

• Tenants with investment-grade credit ratings, parent guarantees, or institutional backing boost valuation.
  
• Long-term leases (9–15 years) with firm lock-in periods and built-in rent escalations are highly valued.
  
• Institutional buyers prefer net leases where the tenant covers taxes, insurance, and maintenance.
  
• If tenant strength is high and lease risk is low, the sale price can command a 10%–15% premium over standard commercial benchmarks.
  
• Assets with poor lease documentation, high churn risk, or informal agreements are typically discounted.
  

These valuation metrics are used in combination, with emphasis shifting depending on whether the buyer is income-focused, yield-driven, or strategically acquiring BTS assets for portfolio optimization in the submarket.