A business park leases 5 lakh sq ft at Rs 90 a month with 85% occupancy. Value it at an 8% cap rate, then test the value per square foot against a replacement cost of Rs 8,000.

At an 8% cap rate the park is worth about Rs 516 crore, Rs 10,328 per sq ft, about 29% above the Rs 8,000 it would cost to rebuild. Net operating income is Rs 41.31 crore after 15% vacancy and 10% of non-recoverable costs. A value that far above replacement cost tells developers to build, and new space nearby would press on rents. Rent would have to fall to about Rs 70 for the value to meet replacement cost, so the bid should price that risk.

A flat let at Rs 30,000 a month does not earn Rs 3.6 lakh a year: it sits empty between tenants, and the owner pays the society charges and the broker. Real estate is valued on what is left. A cap rate is applied to net operating incomeRent actually collected, after vacancy, less the property costs the owner cannot pass on to tenants. It is before interest, tax and depreciation., not to the rent written in the leases. Aakashdeep's potential rent is 5 lakh sq ft times Rs 90 times 12 months, Rs 54.0 crore. At 85% occupancy it collects Rs 45.9 crore, and after non-recoverable costs of 10% of that, Rs 4.59 crore, its NOI is Rs 41.31 crore.

Because a cap rate value is a price for income, and income can be copied. When a building is worth much more than it costs to build, developers build, and the new supply competes for the same tenants until rents fall back. Aakashdeep at Rs 10,328 per sq ft is 29% above the Rs 8,000 rebuild cost, Rs 116 crore across the park. Even if a developer needs a 20% margin on cost, it can build at Rs 9,600 all-in and sell at the market's Rs 10,328. The comparison does not say the value is wrong today. It says the rent that supports it is exposed to competition that the cap rate does not show.

Work backwards from replacement cost. Rs 8,000 per sq ft is Rs 400 crore, which at 8% needs NOI of Rs 32 crore. At 85% occupancy and 10% costs, that is a rent of about Rs 69.7 per sq ft a month, 23% below today's Rs 90. Put the other way, at today's rent the cap rate would have to rise to about 10.3% for the value to equal replacement cost. Either number is a plausible bad case for a park in a market where land is available and new campuses can be finished in two to three years.

Three points. The 8% value is a fair reading of today's market, but a bid at that level is a bet that rents of Rs 90 survive new supply, so the client should check what land is available nearby and what is already under construction. Second, look at the lease book: long leases with fixed escalations protect the income through a supply wave, while leases expiring in the next two years expose it. Third, the 15% vacancy cuts both ways: if the park leased up to 95%, NOI would rise to Rs 46.2 crore and the value to about Rs 11,542 per sq ft, an even wider gap over rebuild cost, so lease-up upside is worth less here than it looks. The limit of replacement cost as a test is that it assumes an equivalent site exists; a park with a location no one can replicate deserves a premium, and the client's analyst should be able to say whether this is one.