Short answer
Yields and capitalisation rates are used in some commercial valuations to convert an income stream into an indication of capital value.
They are most relevant where the property is leased or income-producing and where sufficient rental and sales evidence is available.
The appropriate yield depends on market evidence, lease terms, tenant risk, property quality, location, income security and other investment factors.
Why this matters
Commercial property buyers often consider the income a property produces and the risk associated with that income.
A property with secure market rent, a strong tenant and a long lease may be viewed differently from a vacant property, short lease or over-rented property.
Yield analysis helps the valuer consider the relationship between income and value, but it must be supported by evidence.
What is capitalisation?
Capitalisation is a valuation method that applies a market-derived rate to an income figure to indicate value.
The income figure may need to be analysed carefully, including whether it is passing rent, market rent, net income or another adopted income measure.
The capitalisation rate should reflect market evidence and risk.
What affects the yield
Factors that may affect yield include:
- Location and property type
- Lease term and expiry profile
- Tenant covenant and risk
- Passing rent compared with market rent
- Rent review structure
- Outgoings recoverability
- Building age and condition
- Capital expenditure risk
- Vacancy risk
- Market demand and liquidity
- Evidence from comparable investment sales
No single factor determines yield by itself.
Passing rent and market rent
Passing rent is the rent payable under the existing lease.
Market rent is the valuer’s assessment of rent likely to be achieved under market conditions and assumed lease terms.
If passing rent differs materially from market rent, the valuer may need to consider over-renting, under-renting, reversionary value or other adjustments, depending on the method adopted.
Limits of yield analysis
Yield analysis depends on reliable income and market evidence.
If rent, outgoings, lease terms or comparable investment sales are unclear, the analysis may require assumptions or have limited reliability.
For some smaller commercial properties or owner-occupied premises, direct comparison or vacant possession analysis may be more relevant than income capitalisation alone.
Common misunderstandings
A lower yield is not automatically better.
It may reflect lower perceived risk, stronger income or stronger market demand.
Income must be analysed before it is capitalised.
The adopted income figure matters.
Passing rent and market rent can differ.
This can affect the value analysis.
Yield is not chosen at random.
It should be supported by market evidence and risk assessment.
Capitalisation is not the only commercial method.
The appropriate method depends on the property and evidence.
Related glossary
- Yield
- Capitalisation Rate
- Passing Rent
- Market Rent
- Net Income
- Lease
- Tenant Covenant
- Reversionary Value
- Outgoings
- Vacancy Risk
Related articles
- Commercial Property Valuations
- What is a commercial property valuation?
- What is market rent?
- Vacant possession vs subject to lease value
- What documents are needed for a commercial valuation?
- How is tenant fitout considered?
- What is market rent?
Related services
Prepared by:
Tigran Amiyants, Certified Practising Valuer (CPV), Managing Director, Northbourne Valuers.
Last reviewed:
July 2026.
General information note:
This page provides general information only and does not constitute valuation, legal, taxation, leasing or financial advice. Commercial property matters should be considered with the appropriate qualified adviser. Every valuation depends on the specific property, purpose, valuation date, evidence, assumptions and instructions.