Why Some Commercial Properties Have Higher Yields Than Others

The basic calculation is simple:

Annual rental income ÷ purchase price = gross rental yield

For example:

A property costs S$2 million and generates S$100,000 of annual rent.

The gross rental yield is 5%.

But that number doesn't tell you everything.

It doesn't automatically account for:

• Maintenance fees
• Property tax
• Vacancy
• Repairs
• Leasing costs
• Financing costs
• Acquisition costs
• Other ownership expenses

So when a listing says “5% yield”, the first question I would ask is:

“Is that gross yield, and how was it calculated?”

This is important because two properties showing the same advertised yield may have very different actual economics.

There are situations where a higher yield can reflect attractive pricing.

Imagine two properties with similar rental income.

Why does Property A produce the higher yield?

One possibility is simply that the market is pricing the two properties differently.

But before assuming Property A is underpriced, you need to understand why.

Is the location different?

Is the building different?

Is the tenant weaker?

Is the lease shorter?

Is the property harder to finance or resell?

A higher yield can be attractive.

But you need to understand what you are getting for it.

A commercial property is ultimately an income-producing asset.

So the tenant matters.

Consider two properties with similar prices.

One has a long-established tenant with a relatively long remaining lease.

The other has a newer or less established tenant with a shorter lease.

If the second property offers a higher yield, that difference may partly reflect the market's assessment of the rental income risk.

That doesn't mean the higher-yield property is automatically unattractive.

It means you should investigate:

Who is paying the rent?

How long is the lease?

Is the rental sustainable?

What happens when the lease expires?

How easy would it be to replace the tenant?

This is why Article 8 in Series 1 focused specifically on evaluating the tenant before relying on the rental income.

Two properties can have identical rental yields today while having very different lease situations.

For example:

On paper, both are 5%.

In reality, the income visibility is very different.

The second property may require you to deal with:

• Renewal risk
• Rental adjustment
• Vacancy
• Leasing costs
• Finding a replacement tenant

So when comparing yields, I would also ask:

“How long can I reasonably expect this income to continue?”

A yield is a number at a point in time.

A lease tells you something about the duration and visibility of that income.

Location is another major factor.

A property in a highly established commercial location may attract strong tenant demand and a wider pool of future buyers.

Another property may offer a higher yield because it is located in a less established or less liquid market.

That doesn't automatically make the second property a bad investment.

It simply means the higher yield may be compensating the buyer for taking on different risks.

Even within the same broad area, the micro-location can matter:

• MRT accessibility
• Street visibility
• Foot traffic
• Building accessibility
• Floor level
• Unit position
• Parking
• Surrounding businesses
• Catchment
• Business suitability

CBRE's current Singapore market commentary also highlights location as a major factor affecting lessee and buyer interest and pricing, including both public transport proximity and micro-location factors such as streetscape.

“CBD” or “city fringe” alone doesn't tell you enough.

You still need to understand the actual property.

Here's a question I think every commercial property buyer should ask:

“If my tenant leaves tomorrow, who would rent this property next?”

This question changes the way you look at yield.

Suppose a property is generating an unusually high rent today.

That sounds attractive.

But if the current tenant leaves and comparable tenants would only pay significantly less, the advertised yield may not be sustainable.

Conversely, a property with a slightly lower current yield may have strong underlying rental demand and greater potential to attract replacement tenants.

URA's commercial rental data provides market rental information by location, floor area and other characteristics, while its retail data is based on rental contracts submitted for stamp duty assessment.

That kind of market evidence can help you determine whether the current rent is broadly supported by the market.

Don't just ask what the tenant is paying. Ask what the market would pay.

This is probably the most important question in the entire article.

Imagine you have:

Property A — 5% yield

versus

Property B — 3.5% yield

It is tempting to say:

“Property A is obviously better.”

But what if Property B has:

• Stronger location
• Longer lease
• Better tenant
• Better building
• Wider buyer pool
• Easier resale
• Stronger underlying rental demand

Then the lower yield may simply reflect the market placing a higher value on those characteristics.

This is why I don't ask:

“Which property has the higher yield?”

I ask:

“What am I getting in exchange for accepting the lower yield?”

That is a much more useful comparison.