Capitalisation rate (cap rate)

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

The capitalisation rate is the yield buyers demand from an income-producing property: value is the property's net operating income divided by the cap rate. Because the rate is set by the market rather than by the building, a rise in it lowers the value of every comparable property at once — a building earning US$1.0m a year is worth US$20m at a 5% yield and about US$16.7m at 6%. The loan has not moved, so its loan-to-value ratio rises without anything happening to the building, which is why property lenders test value at a higher yield than today's.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.