How to Compare Two Commercial Properties When the Yields Are Different

Before comparing yields, understand what you are actually paying.

A lower-priced property can produce a higher yield simply because the purchase price is lower relative to its rental income.

That doesn't automatically make it a better investment.

Look at:

• Asking price
• Price per square foot
• Unit size
• Comparable transactions
• Total acquisition cost
• Whether the asking price is realistic

The first question should be:

"Am I paying a reasonable price for this particular property?"

Only after that should you start judging the rental return.

Gross yield is useful because it gives you a quick way to compare rental income against purchase price.

But it is only a starting point.

For example:

Property A has the higher yield.

But Property B may have a stronger tenant, longer lease, better location or stronger resale demand.

So don't stop at:

"Which one has the higher yield?"

Ask:

"What am I getting in return for the lower yield?"

Rental income is only as strong as the tenancy supporting it.

When comparing two properties, I would look at:

• Tenant profile
• Business type
• Lease expiry
• Rental level
• Renewal options
• Rental escalation
• Tenant dependence on the location
• Replacement tenant demand

A property with a 5% yield and a lease expiring soon may carry a different level of risk from a property yielding 4% with several years of tenancy remaining.

This doesn't mean the 4% property is automatically better.

It means the yield needs to be considered together with the quality and sustainability of the income.

Two properties can have similar sizes and prices but very different leasing prospects.

Look at:

• Accessibility
• MRT proximity
• Foot traffic
• Visibility
• Unit position
• Floor level
• Building profile
• Surrounding developments
• Tenant catchment
• Suitability for different businesses

For example, a ground-floor retail unit with strong visibility may have a broader tenant pool than a similar-sized unit located in a less accessible part of the building.

The difference may not be obvious when looking at the yield alone.

This is one of my favourite questions when comparing commercial properties:

"Why is this property offering a higher yield?"

There should be a reason.

Perhaps the property is genuinely underpriced.

Perhaps the owner is motivated to sell.

But perhaps the market is pricing in something you haven't noticed.

It could be:

• Shorter remaining lease
• Weaker tenant demand
• Less desirable location
• Higher vacancy risk
• Limited approved use
• Poor unit positioning
• Smaller resale market

A higher yield can be an opportunity.

But it can also be the market telling you that there is additional risk.

The "better" property also depends on the buyer.

One investor may prioritise rental income.

Another may prioritise capital preservation.

Another may want an owner-occupied property.

Someone else may be looking for a long-term freehold asset.

Your available capital matters too.

A property requiring a larger upfront commitment may provide lower yield but fit a long-term investment strategy better.

So before deciding between two properties, ask:

"Which property is better for me?"

Not simply:

"Which property is better?"

Finally, think beyond today's tenant and rental.

Ask:

"Who will buy this property from me in the future?"

Consider:

• Future buyer profile
• Tenant demand
• Resale demand
• Tenure
• Remaining lease
• Location
• Unit size
• Price point
• Potential future competition

A property may provide an excellent yield today but have a limited resale market.

Another property may have a lower yield but appeal to a much broader group of future buyers.

That difference can become very important when you eventually want to exit.