Three of the most-cited numbers on a commercial property listing are cap rate, gross yield, and net yield. They are routinely used interchangeably and they should not be. The differences are not academic: they can shift the implied valuation of an asset by 10% to 20% and they explain why two assets with the same headline yield can produce very different actual returns.
This article covers what each metric is, how it is calculated, when each one applies, and the buyer-side questions that translate the headline number into the actual net income the asset will produce in the buyer's hands.
The agent quotes the number that makes the asset look the best. The buyer's job is to recalculate every number against a consistent definition before comparing assets or making an offer.
The Three Metrics
Gross yield
Annual gross rental income divided by purchase price (or current market value), expressed as a percentage. The simplest of the three. Does not account for outgoings, vacancy, or capex.
Gross yield = (Annual gross rent) / (Purchase price) × 100
Net yield
Net operating income (gross rent minus operating expenses not recovered from the tenant) divided by purchase price. More meaningful for investors because it reflects what actually reaches the owner.
Net yield = (Net operating income) / (Purchase price) × 100
Cap rate (capitalisation rate)
Net operating income divided by the property's value, used to derive value from income or vice versa. In practice cap rate is the rate the market applies to a stabilised net operating income to arrive at a market value.
Cap rate = (Net operating income) / (Property value) × 100
Cap rate and net yield are numerically similar but conceptually distinct. Cap rate is a valuation tool; net yield is a performance metric. Cap rate is what valuers, lenders, and institutional buyers use to price assets; net yield is what private buyers use to compare to their cost of capital.
1 Why Gross Yield Misleads
A commercial property advertised at "8.5% gross yield" sounds attractive. Once outgoings are netted off, the same property may produce 6.2% net. The buyer thought they were buying an 8.5% asset; they were not.
Outgoings on an unrecovered or partially-recovered lease commonly run:
- Council rates: 0.5% to 1.2% of property value annually
- Insurance: 0.1% to 0.3% of property value annually
- Land tax: 0.3% to 1.5% depending on state and ownership structure
- Body corporate (strata): 0.2% to 1.0%
- Repairs and maintenance: 0.3% to 1.0% depending on building age
- Property management: 4% to 6% of gross rent
- Vacancy and bad debt allowance: 3% to 5% of gross rent
On a gross lease where the tenant pays no outgoings, the entire stack falls on the landlord. On a net lease, most are recovered. On a triple net (NNN) lease, almost all are recovered including land tax on a single-holding basis.
2 Lease Structure Drives Net Yield
Gross lease
Tenant pays rent only. Landlord pays all outgoings. Common in office and some retail. Headline rent looks high, net yield is significantly lower than gross.
Net lease
Tenant pays rent plus a defined subset of outgoings (commonly council rates, water, insurance). Landlord pays the rest. Common in mid-market office and retail.
Semi-gross lease
Hybrid: tenant pays rent and a fixed contribution to outgoings, with the landlord covering increases beyond a baseline. Common in retail.
Triple net (NNN) lease
Tenant pays rent plus all outgoings including land tax (single-holding basis), repairs, insurance, and management. Landlord retains structural and major capex obligations only. Common in industrial, single-tenant retail, and childcare.
The net yield on the same headline rent varies materially across these structures. A gross-leased office with $200,000 annual rent and $80,000 in outgoings produces a different net yield to a triple-net leased industrial with the same rent and only $5,000 in landlord-borne capex.
3 Cap Rate as a Valuation Tool
Cap rate is the inverse of a price-earnings multiple applied to net operating income. It compresses the buyer's view of asset quality, lease length, tenant covenant, and growth prospects into a single number.
The valuation formula
Property value = (Net operating income) / (Cap rate)
A property with $500,000 net operating income trading at a 6% cap rate is valued at $8.33 million. The same property trading at a 5% cap rate is valued at $10 million. A 100 basis point cap rate move shifts the implied value by 20%.
What moves cap rates
- Asset class. Industrial and long-WALE retail typically trade tighter than suburban office and short-WALE multi-tenant.
- Tenant covenant. Listed national tenants compress cap rates; private operators widen them.
- Lease length. Long WALE compresses; short WALE widens.
- Location. Sydney CBD trades tighter than Adelaide CBD; metro tighter than regional.
- Macro rates. Higher long-bond rates push cap rates wider; lower bond rates compress them.
- Building specification and capex. Modern, low-capex buildings trade tighter than older, capex-heavy.
4 Reading a Listing
Three practical things a buyer should do with every commercial listing:
1. Identify which metric is quoted
"Yield" without qualification is usually gross. "Net yield" is calculated after the agent's view of outgoings. "Cap rate" is the agent's view of the market multiple. None is wrong; all are the agent's interpretation.
2. Rebuild the calculation
From the property information, work out:
- Stated gross rent (passing or face).
- Outgoings (from the disclosure statement or property information).
- Recovery basis (gross, net, NNN).
- Calculate gross yield and net yield independently.
3. Adjust for buyer-side reality
The agent's net yield is usually calculated on outgoings as the vendor or property manager has them recorded. Your figures may differ:
- Your land tax position is different to the vendor's (different ownership entity, different aggregation).
- Your management fee may differ from the current arrangement.
- Your insurance premium may differ once you take ownership.
- Capex profile in your hands depends on your maintenance approach.
5 Real-World Application
Example: comparing two listings
Listing A is described as 7.2% gross yield on a $4 million suburban office.
Listing B is described as 5.8% net yield on a $4 million industrial property.
Which is the better income asset for a buyer at the same purchase price?
Listing A's gross rent is $288,000. Outgoings on a partially-recovered net lease might be $60,000 unrecovered. Net operating income is $228,000. Net yield is 5.7%.
Listing B's net operating income (already net-of-outgoings) is $232,000. Net yield is 5.8%.
The two assets are functionally equivalent on income. The decision then depends on asset class preference, WALE, tenant covenant, and growth profile, not the headline yield.
6 What the Numbers Don't Tell You
Yield metrics are point-in-time snapshots of income against price. They do not capture:
- Rent growth over the holding period (CPI vs fixed reviews).
- Capex obligations that reduce net cash flow over time.
- Tenant covenant deterioration that compresses re-leasing income.
- Location-driven capital growth or decline.
- Lender appetite that determines achievable leverage.
- Vacancy at lease end and re-leasing periods.
A 5.5% yield on a long-WALE industrial with CPI plus minimum reviews is structurally different to a 5.5% yield on a short-WALE suburban office with fixed 3% reviews and a capex liability. The yield number is the same; the cash flow profile over a 10-year hold is materially different.
Frequently Asked Questions
What is "passing yield"?
Passing yield is the yield on the rent currently being paid by the tenant. "Reversionary yield" or "market yield" is the yield on the rent the asset would attract if re-leased at market today. A material gap between passing and reversionary indicates the lease is below or above market.
What is "stabilised yield"?
Stabilised yield is the yield assuming the asset is fully leased, all outgoings normalised, and all incentives amortised. It is the number used by valuers and institutional buyers to compare assets on a like-for-like basis.
Is cap rate the same as discount rate?
No. Cap rate is applied to a single year's net operating income. Discount rate is applied to a stream of future cash flows in a DCF model. The two are related but answer different questions.
Why do quoted cap rates change over time?
Because the market's view of asset risk changes. Tighter cap rates in 2021 reflected low bond rates and abundant capital; wider cap rates since 2022 reflect higher rates and more cautious capital. The same asset can trade at different cap rates in different market windows without anything about the asset itself having changed.