Yield is another term for income, i.e. rent collected. To calculate the yield of a commercial property, the property's value is divided by the current annual rentail income and then expressed in percentage.
Yield forms part of the total Return of a property. See our Commercial Property Buying Guide for a more in-depth explanation of Return here.
As a general rule, properties with strong potential for capital appreciation will sell on lower yields. The lower yield is balanced out by a potentially larger capital return on sale of the property.
Properties that occupy prime locations with limited vacancies and strong historical rental growth will sell on lower yields. For example retail shops in Glenferrie Road Hawthorn typically sell on yields of 3-4%.
The reverse is also usually the case. Properties in areas which have historically not experienced strong capital growth and have a large supply of available stock will sell on higher yields. Industrial properties in the outer suburbs often sell on yields of 7-8% and the higher yield is offset by lower potential for capital returns.
Example Calculation of Yield
Yield = (Current Rental Income/ Purchase Price) x 100
For example if a property returning $30,000 net per annum plus GST and outgoings is purchased for $800,000 the yield is 3.75%.
Yield = (30,000/800,000) x 100
Written by Gerry Gleeson
After a successful career as a stockbroking analyst and manager of a private investment business, a long time fascination with property and a desire to try something new led Gerry into the property management sector.