Property marketing leans heavily on yields. “Offering a 7% yield” sounds like a promise of 7% a year, but a yield is simply a ratio, calculated in different ways, that describes the income from a property relative to its price. Understanding what is, and is not, included is essential before you compare commercial property investments.

What is a yield?

A yield expresses annual income as a percentage of the amount paid. If a building is bought for £1,000,000 and lets for £70,000 a year, the simple yield is 7%. That number is useful for comparing buildings and sectors, but it does not tell you the total return, the risk, or whether the rent will keep being paid.

Gross, net initial and other yields

  • Gross yield: annual rent divided by the price. It ignores buying costs and running costs, so it flatters the figure.
  • Net initial yield (NIY): the rent received, after non-recoverable costs, divided by the purchase price plus acquisition costs such as stamp duty, agent and legal fees. This is the standard measure in UK commercial property because it reflects what you actually pay.
  • Reversionary yield: the yield you would expect if the rent moved to the current market level, for example at the next review or lease renewal. It is higher than the initial yield when the property is let below market rent, and lower where it is over-rented.
  • Equivalent yield: a blended figure that takes account of the current rent and the expected rent after reviews, giving a single average for the building.

A simple illustration

These figures are invented to show the arithmetic and are not a forecast. A unit is bought for £1,000,000. Costs such as stamp duty, agent fees and legal fees add around 6.8%, taking the total outlay to £1,068,000. The annual rent is £70,000 and non-recoverable costs are £2,000, leaving net income of £68,000.

The net initial yield is £68,000 divided by £1,068,000, which is about 6.4%, compared with a headline 7% on the price alone. The gap is the cost of buying, which is why the same building can be quoted at different yields depending on the method.

Why a yield is not a return

  • Capital value changes. A 6% yield is no use if the building falls 15% in value. Total return combines income and capital growth or loss.
  • Voids and rent-free periods. A vacant unit pays nothing, and incoming tenants often negotiate free periods that reduce effective income.
  • Tenant failure. A yield assumes the tenant keeps paying. A weak tenant may justify a higher yield for good reason.
  • Debt. Borrowing can magnify returns and losses, and rising interest rates can reduce values.
  • Costs of exit. Selling involves fees and delay.

What drives yields up and down

Yields move with the market. Stronger demand for a sector, lower interest rates and secure long leases tend to push yields down (prices up), while weak tenant demand, higher rates and short leases push yields up (prices down). A very high yield compared with similar buildings usually signals higher risk, such as short lease length, a weak tenant, poor location or the need for major spending.

Questions to ask about any quoted yield

  • Which yield is it: gross, net initial, reversionary or equivalent?
  • Are the purchase costs and non-recoverable expenses included?
  • How long is the lease, and how strong is the tenant?
  • Is the rent at market level, above it or below it?
  • Does the figure rely on debt, and on what terms?

Routes to commercial property

How you invest changes what yield means to you. In a pooled fund, the quoted yield is before fund charges. In a syndicated deal, it depends on the sponsor’s plan. In a bond, the interest rate is a different thing again, as the investor is a lender. Our guide to how to invest in commercial property compares the routes, and the full commercial property guide covers sectors and leases. For a wider view, see whether commercial property is a good investment.

Explore our commercial property hub, or compare commercial property opportunities matched to your investment level and eligibility.

This article is general information only and does not constitute financial advice. Property values and rental income can fall as well as rise, and you could lose some or all of the money you invest. Seek independent advice from an FCA-authorised financial adviser if you are unsure.