Income method (méthode par le revenu)

The income method looks at a building as an investment: its value is what investors are prepared to pay for the income it produces. The Charte de l’expertise en évaluation immobilière (the French property valuation charter) describes it as a form of investment analysis based on the capacity of a property to generate net benefits, generally monetary, and on the conversion of those benefits into a present value. It applies naturally to let buildings, commercial premises and offices, and serves as a cross-check for dwellings.

Three elements interact: the current and expected net income, the timing of the events that affect it (end of lease, works, reletting) and the rate that reflects how buyers weigh those flows over time. For a market value, the Charte requires that all these inputs be derived from the market; if they come from the situation of a particular investor, the result is an investment value.

Where the rule comes from

Title III, § 2.2 of the Charte (6th edition, November 2025) distinguishes two families of models. Traditional models (direct capitalisation, term and reversion, layer models) build growth implicitly into the rate. Explicit models (DCF) project cash flows over a defined horizon with an exit value. The Charte warns against double counting growth between the rate and the flows. Chapter 8 defines the rates: capitalisation (income over value net of purchase costs), yield (income over value including purchase costs) and discount rate. The EVS 2025 deal with the income approach in § 7 of their methodology section.

In a valuation report

I first establish the income: passing rent, market rent, non-recoverable charges, vacancy. I choose the appropriate model (direct capitalisation for a stable income, reversion where the passing rent departs from the market, DCF for a complex asset) and justify the rate by references to transactions in let buildings. The report presents the calculation, the assumptions and a sensitivity analysis, then reconciles the result with the comparison method. The Charte points out that no method is universal and that the expert must explain the choice made.

Example

Light industrial premises let at €42,000 a year excluding VAT to a tenant in place for four years, with a market rent estimated at €45,000. Non-recoverable charges and vacancy allowance: €4,000, leaving a net income of €38,000. Sales of comparable let premises show capitalisation rates of 7 % to 7.75 %. At 7.25 %, the value net of purchase costs is €524,000, rounded to €525,000. A reversion model, with a move to market rent at the end of the lease in two years, gives €535,000: I adopt €530,000 and state it with its assumptions.

Not to be confused with

The comparison method starts from prices; the income method starts from rents. The yield of an investment, calculated after the event on a price including purchase costs, is not the capitalisation rate used for valuing.