Placepoint

Reversionary yield

Reversionary yield is the yield level a building would trade at if all current leases were replaced by new leases at today's market rent. The figure expresses the ratio between market rent after deduction of normalised costs and today's market value, and it is a key indicator in due diligence when buying office buildings with a short remaining lease term.

The distinction between net initial yield and reversionary yield captures a difference between today's and tomorrow's cash flow. A building let on long leases signed ten years ago will often have contract rent below today's market level: the leases have grown with CPI at a factor below market rent growth. Net initial yield then looks artificially low, while reversionary yield reveals the real potential once the leases roll over. Conversely, a building with overpriced leases will have an attractive net initial yield today and a lower reversionary yield at lease renewal, because market rent captures a downward correction. Decision-makers therefore use both figures side by side.

In practice, you calculate reversionary yield by replacing contract rent with an estimated market rent in the cash flow model, usually taken from the brokerage houses' segment reports (Akershus Eiendom, Newsec, DNB Næringsmegling). Market rent is differentiated by location (Vika versus Lysaker versus Skøyen), building category (office A versus B versus C) and lease term. The assumptions about tenant fit-out, incentives and accrued vacant months must also be normalised: a new lease at market rent does not mean free occupancy.

Reversionary yield is also used as the exit yield in the final year of a multi-year discounted cash flow. You then assume that the building is sold at a future point in time at the yield the market will price the updated cash flow at. The exit yield is often set 25 to 50 basis points higher than today's reversionary yield to reflect uncertainty about the market cycle in 5 to 10 years. A typical mistake is to set the exit yield equal to today's prime yield without considering that the building will be 10 years older. Most analysts add an age premium.

In Placepoint, you can compare remaining lease term, rent level per square metre and tenant profile from the property panel when you estimate reversionary yield using the brokerage houses' market rent tables.

How it looks in Placepoint

In Placepoint, you find this in Property panel:

Reversionary yield in Placepoint

From Placepoint's glossary: Reversionary yield

More information: Eiendom Norge: Market reports, Akershus Eiendom: Market Report, Store norske leksikon: yield

English: Reversionary yield.

Common questions we come across

When does reversionary yield matter more than net initial yield?

When the contract rent in the building differs materially from the market rent. If the leases are overpriced or underpriced, or if the remaining lease term is short (under 3 to 5 years), net initial yield gives a misleading picture and reversionary yield is the key indicator.

How do I estimate the market rent to use?

Use published market reports from Akershus Eiendom, Newsec or DNB Næringsmegling to find quarterly market rent per square metre for comparable locations and building categories. Adjust for the building's actual standard and efficiency before you put the level into the model.

What is exit yield and how does it relate to reversionary yield?

Exit yield is the reversionary yield used in the final year of a multi-year model, with a risk premium for the fact that the building is older when it is sold. It is usually set 25 to 50 basis points above today's reversionary yield to reflect age and market cycle risk.

Where do I find today's market rents for Oslo?

Quarterly reports from Eiendom Norge, Akershus Eiendom and Newsec publish market rents by sub-area (Vika, Bjørvika, Skøyen, Lysaker, Helsfyr) and building category. DNB Næringsmegling, Eiendomsspar and large property managers also publish their own market overviews.