Over-rented property (reversionary yield)
What is an over-rented property, and what does the reversionary yield show?
ONE OF 416 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A property is over-rented when its passing rent, what tenants pay, is above what the space would let for today. The excess lasts until the rent can be reset: upward-only or ratchet reviews, common in UK and New Zealand leases, can hold much of it until expiry; several Australian states void ratchets in retail shop leases, and a 2026 Act, awaiting commencement, bars them in new business leases in England and Wales. The reversionary yield is market rent over value: a US$16m building paying US$1.2m against market rent of US$1.0m yields 7.5% on passing rent but 6.25% on reversion. A lender usually tests cover and value on the reverted income.
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.
// THE FULL PAGE
Over-Rented Property: a Worked Example →
Lend on the rent the space will earn, not the rent it earns.
// WHAT IT IS NOT
The capitalisation rate values a property on its current net income; the reversionary yield measures the return once rent has moved to market, and the gap between the two shows how much of today's income is temporary.
// WORKED IN
// NEXT TO IT
- Loan to cost (LTC)
- Presales
- Interest reserve
- Quantity surveyor (QS)
- Retention (construction)
- Peak debt
- Cost to complete
- Sunset clause (off-the-plan sale)
- Practical completion
- Capitalisation rate (cap rate)
- Development feasibility
- Release price
- Contingency (construction budget)
- On-completion value
- Capitalised interest (funded interest)
- Residual stock loan
- Stretch senior
- Pre-let (agreement for lease)
- Cost overrun guarantee
- Completion guarantee
- Residual land value
- Profit on cost
- Equity first (development loan)
- Loan to gross development value (LTGDV)
- Weighted average lease expiry (WALE)
- Debt yield
- Rent roll (tenancy schedule)
- Net operating income (NOI)
- Vacancy allowance
- Effective rent (lease incentives)
- Rent cover
- Occupancy cost ratio
// SUBSCRIBE
The Lab.
One case file and one question, in your inbox every Tuesday morning, New Zealand time. The senior banker's read opens only after you answer.
FREE WITH IT · THREE PDFS
An interview case, an annotated credit paper, and a one-page loan application sheet.
No spam. Unsubscribe anytime. Educational content only.