Cap rate

Short form for 'capitalization rate'. It is a measure of value and risk (interalia the ageing process and/or future earning potential) of a building and is calculated by dividing the net returns on rental for one year by the purchase price or market value of a building.In valuation terms it is the rate at which the net income of a building is capitalised into perpetuity to derive its market value.Cap rates are the property equivalent of the forward earnings yield of listed shares.

Part of the Commercial Property glossary — plain-English definitions of the terms you meet when leasing, buying or selling commercial space in South Africa. See also our how-to guides.