Investor Guide
Cap Rates and Yield Analysis Explained
Capitalisation rate is the standard valuation metric for South African commercial property. Get the cap rate right and the price reveals itself. Get the inputs wrong and you overpay by 15 percent without noticing. This guide walks through the calculation, the South African market ranges, and the trap most first-time investors fall into.
Authored by the Africa Estate commercial specialist team.
The formula
Cap rate = Net Operating Income / Purchase Price.
A R10 million property generating R1 million in annual NOI has a 10 percent cap rate. The inverse statement is also useful: at a 10 percent target cap rate, R1 million NOI supports a R10 million purchase price.
What goes into NOI
Net Operating Income is annual rental income LESS annual operating expenses, BEFORE finance costs and BEFORE tax. Specifically:
- Plus gross rental income for the year (all tenants, including escalations to date).
- Minus vacancy provision (typically 5 to 10 percent depending on sector and tenant profile).
- Minus operating expenses landlord carries: rates, taxes, insurance, common-area maintenance, security, cleaning, managing-agent fees.
- Excludes bond interest (a financing cost, not operating).
- Excludes tax (NOI is pre-tax).
- Excludes capital expenditure (NOI is income-statement, not capex).
South African market ranges
These are current SA market norms, subject to sector cycles and macro conditions. Always sanity-check against recent comparable transactions.
- Office (A-grade Sandton, Rosebank, Waterfall): 8.5 to 10 percent.
- Office (B-grade, decentralised): 10 to 12 percent.
- Industrial (modern logistics, multi-tenant): 9 to 11 percent.
- Industrial (older single-tenant): 10 to 12 percent.
- Retail (anchor-tenanted convenience centre): 8.5 to 10 percent.
- Retail (neighbourhood, line-shop): 9.5 to 11.5 percent.
- Retail (high-street, secondary city): 10 to 13 percent.
Cap rate vs gross yield vs net yield
Gross yield uses gross rental income (not NOI) divided by purchase price. Higher than cap rate because it ignores operating expenses. Useful for quick comparison, misleading for valuation.
Net yield uses NOI minus financing costs divided by equity invested. Useful for understanding cash-on-cash return after debt service. Sensitive to LTV and bond rate.
Cap rate uses NOI divided by purchase price, debt-neutral. The valuation metric. Use cap rate to value the asset, use net yield to evaluate whether to use leverage.
The first-time investor trap
The most common mistake is using the gross rental on the rent roll as if it were NOI. On a R1.2 million gross rental property at a "10 percent cap rate" the implied price is R12 million. But if operating expenses are R300,000 a year, real NOI is R900,000 and the real cap rate at R12 million is 7.5 percent. The buyer effectively overpaid by R3 million. Always demand three years of actual income statements before calculating cap rate. The Africa Estate How to buy commercial property guide covers the full due-diligence pack.
Need a cap-rate sanity check?
Send us the listing and the rent roll. We will reconstruct the real NOI and the real cap rate before you put pen to paper.