Commercial Property Yields Explained
Written by Scott Jones, founder of CommercialPropertyKiln · Last updated
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Yield is the language of commercial property investment. Understanding the different yields, and what drives them, is essential to buying well.
The main yields
- Gross yield: annual rent divided by the price. A quick headline figure.
- Net initial yield (NIY): the net income after non-recoverable costs, divided by the price plus purchaser's costs. The standard investment measure.
- Reversionary yield: the yield if the rent rises to the estimated rental value (ERV) at the next review or renewal.
- Equivalent yield: a single blended yield that reflects both the current rent and the reversion.
What drives yield
A lower yield means a higher price for each pound of income, and reflects lower perceived risk. The main drivers are the strength of the tenant (covenant), the length of the lease, the sector, and the location and quality of the building. Prime, well-let industrial trades at keener yields than secondary offices, for example.
Yield and value
Because value is roughly income divided by yield, a small shift in yield moves value a lot. That is why a rent increase at review, or an improvement in covenant, can add disproportionate capital value. See the rent review calculator.
Run the numbers
Our commercial yield calculator works out gross, net initial and reversionary yields for a property, so you can compare opportunities on a like-for-like basis.
What is net initial yield?
The net income after non-recoverable costs, divided by the gross purchase price (price plus purchaser's costs). It is the standard measure for valuing commercial investment.
What drives a commercial yield?
Tenant covenant strength, lease length, sector, and the location and quality of the building. Lower yield means a higher price per pound of income.