How to calculate the yield on a commercial property — and the numbers people forget

A commercial buyer is not buying on taste. They are buying a number, and the number is yield: annual rent divided by cost. The problem is that most people calculate the easy half and stop.

Gross yield

Gross yield = (annual rent ÷ purchase price) × 100. A shop at EGP 12M letting for EGP 70,000 a month is EGP 840,000 a year, so 7% gross. That takes three seconds, which is why it is the number that appears in listings.

What has to come off

• Void periods — the unit will not be let twelve months a year forever
• Maintenance and repair, especially in an F&B unit or a hard-worked warehouse
• Service charge or owners' association fees if the unit sits in a mall or an office building
• Management — whether you pay someone or spend your own time
• Insurance
• Tax due on the rental income
• Fitting the unit for each new tenant when one leaves

Net yield = (annual rent − all of that) ÷ purchase price. The gap between gross and net in Egyptian commercial property is not small — a third of the headline number or more, depending on the asset. That is not a reason to walk away; it is a reason to do the arithmetic before you negotiate.

Comparing two units

When you compare, compare price per square metre and net yield together. A cheaper unit per metre can be the worse deal if the rent it commands is lower by a larger margin. And the reverse: an expensive unit on a main street can produce a higher yield and shorter voids — and the shorter void is part of the return even though it never appears in the formula.

Two mistakes buyers make

• Calculating yield on an expected rent rather than a contracted one. The difference between the two is everything.
• Forgetting that a contracted rent has a term. A lease with eight months left is not the same asset as a five-year lease with a defined annual uplift, even at an identical monthly figure.