Every commercial landlord dreams of the moment a below-market lease expires and the rent resets to the full market rate. Reversionary yield is the number that quantifies that dream.
Reversionary yield calculates what the yield would be if the property were let at its full Estimated Rental Value (ERV) rather than the current passing rent. It answers the question: if this tenant leaves and I re-let at market rent, what will my return be?
Here is a typical scenario. You buy a shop with a tenant paying £30,000 a year on a lease with three years left. The ERV is £45,000. The purchase price is £500,000. Your NIY based on the current rent is 6%. But your reversionary yield, based on the ERV of £45,000, is 9%.
That 3% gap is your upside. It represents the potential increase in income and, more importantly, the increase in capital value when the rent resets. If the market NIY stays the same, your property value jumps from £500,000 to £750,000 when the rent hits £45,000.
The risk, of course, is that the tenant leaves and you cannot find a new tenant at the ERV. Or the market NIY shifts against you. That is why reversionary yield is always quoted alongside NIY — so you can see the range of possibilities.
Professional investors look for properties where the reversionary yield is significantly higher than the NIY. That gap represents the value they can unlock through active asset management.
The formula
Reversionary Yield (%) = ((Estimated Rental Value - Operating Costs) / Purchase Price) × 100
Why this matters
Reversionary yield tells you whether there is hidden value in a commercial property. A wide gap between NIY and reversionary yield means there is an opportunity to increase income. A narrow gap means the property is already performing at its potential.
Property maths is not optional. If you want someone to run the numbers with you, Xelox Properties can help. We cover Portsmouth, Hampshire, and the South Coast.