Understanding Commercial Property Yields in NSW: Cap Rates, Net Yields and What to Expect

Why yield is the language of commercial property

In residential property, value is primarily determined by comparable sales. In commercial property, the primary valuation framework is yield: the relationship between the income an asset generates and its purchase price. Understanding yield — how it is calculated, what it means, and how to use it — is foundational to commercial property investment.

Yield also provides a common language for comparing assets across different locations, asset classes, and price points. A $2M industrial asset generating $140,000 net annual income yields 7.0%. A $3M retail asset generating $180,000 net annual income yields 6.0%. Without the yield framework, comparing these assets is difficult. With it, you can understand what the market is paying for different risk profiles — and whether a specific asset represents fair value or a discount.

Gross yield vs net yield

Gross yield is calculated on total rent before deducting any expenses the landlord is responsible for. Net yield is calculated on the income remaining after deducting landlord expenses — management fees, rates, insurance, land tax, and any outgoings not recoverable from the tenant. What matters is net yield. The difference between gross and net yield can be substantial, particularly for assets where the landlord bears significant outgoings.

The capitalisation rate (cap rate)

The capitalisation rate — the "cap rate" — represents the relationship between a property's net operating income (NOI) and its value. The formula is: Cap Rate = NOI / Value. Equivalently: Value = NOI / Cap Rate.

If a commercial property generates $150,000 NOI and the market capitalisation rate is 6.0%, the indicated value is $150,000 / 0.06 = $2,500,000. The power of this framework is in understanding what changes to NOI or cap rate mean for value. If NOI grows by 10% to $165,000 and the cap rate simultaneously compresses to 5.5%, the indicated value increases to $3,000,000 — a 20% total increase from the combined effect of income growth and yield compression.

What determines the cap rate for a specific asset?

Cap rates vary based on risk factors that the market prices collectively. Lower-risk assets attract lower cap rates (higher prices); higher-risk assets attract higher cap rates (lower prices). Key risk factors include:

• Lease security: Long WALE with strong-covenant tenants reduces income risk and attracts a lower cap rate
• Tenant covenant: Listed corporations and government entities attract cap rates 100 to 200 basis points lower than equivalent assets tenanted by private operators
• Asset class: Industrial, retail, and office carry different risk profiles and correspondingly different cap rate ranges
• Location and liquidity: Metropolitan markets trade on tighter cap rates because there are more buyers and assets are easier to resell

Indicative yield ranges — NSW 2026

• Prime industrial, long lease: 4.5% to 6.0%
• Secondary industrial: 6.0% to 8.5%
• Anchored neighbourhood retail: 5.5% to 7.0%
• Strip retail: 6.0% to 8.0%
• Commercial office (A-grade): 6.0% to 7.5%

Passing yield vs market yield

An asset's passing yield is the yield on the current rent. Its market yield is the yield on what current market rent would be. If an asset is leased at below-market rent, the passing yield understates the income potential at lease renewal — buying this type of asset at a price based on passing yield can create a significant valuation gain when rent is reset to market. Conversely, an asset leased at above-market rent carries rental downside risk at renewal. Paying a price that assumes the passing rent is sustainable when it isn't is one of the most common — and costly — commercial property acquisition errors.