Glossary

Capitalisation rate (cap rate)

What a capitalisation rate is, how it's used to value income-producing property, and why lenders watch cap rate movements.

A capitalisation rate, or cap rate, is a property's net annual income expressed as a percentage of its value, used as a quick method for estimating or cross-checking the value of an income-producing commercial property. A lower cap rate implies a higher value for a given level of income, and cap rate movements across an asset class or location directly affect what a valuer will support, which in turn affects how much a lender can advance against a property. Lenders watch cap rate trends closely on longer-term commercial property facilities, since a compressed cap rate environment that later reverses can leave a loan sized against a valuation the market no longer supports. Cap rates vary meaningfully by asset class, location and tenant quality, so a rate appropriate for a metro industrial asset says little about what applies to a regional retail property.

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Commercial property loans · WALE · GRV

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