Reversion is quoted as one percentage for the whole building. The business plan can only bank the part that reaches a rent review or an expiry before the exit.
Divide the estimated rental value of the let space by the rent passing and subtract one: on an illustrative five-tenant office, ERV of 2,378,000 against passing rent of 2,150,000 gives a reversionary potential of 10.6 per cent. Then test it lease by lease, because only rent reviews and expiries let the landlord capture it. Within a five-year business plan this building captures 158,000, or 7.3 per cent of passing rent.
Worked in full in The Real Estate Asset Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Reversion is the most quoted number in an under-rented building's sales particulars and the most loosely used in its business plan. The headline percentage adds every tenant's gap between passing rent and ERV, including gaps the landlord cannot reach before the exit and gaps that run the wrong way. The asset manager's version of the calculation asks when each gap can be closed, in which direction, and how much of it the plan can bank.
| Tenant | Area, m² | Passing per m² | Passing rent | At ERV | Next event |
|---|---|---|---|---|---|
| T1 | 2,000 | 250 | 500,000 | 580,000 | Upward-only review, year 2 |
| T2 | 1,500 | 300 | 450,000 | 435,000 | Expiry, year 4 |
| T3 | 1,000 | 220 | 220,000 | 290,000 | Expiry, year 7 |
| T4 | 2,500 | 260 | 650,000 | 725,000 | Upward-only review, year 3 |
| T5 | 1,200 | 275 | 330,000 | 348,000 | Upward-only review, year 1 |
| Total | 8,200 | 2,150,000 | 2,378,000 |
For simplicity, a review or expiry resets the rent to ERV from the following year, with no void; reviews are upward only, so an over-rented tenant at review keeps its rent. ERV is held flat to isolate the lease mechanics.
Reversionary potential = Σ (area × ERV) ÷ Σ (area × passing) − 1 = 2,378,000 ÷ 2,150,000 − 1 = 10.6%
Captured reversion = Σ over events inside the plan of area × (ERV − passing), floored at zero at an upward-only review
In Excel, with areas in B2:B6 and passing rents in C2:C6: =SUMPRODUCT(B2:B6,290-C2:C6)/SUMPRODUCT(B2:B6,C2:C6) for the headline. For the captured figure add a column =IF(event_year<5,IF(AND(type="review",290<passing),0,area*(290-passing)),0) and sum it.
The headline nets 243,000 of under-renting against 15,000 of over-renting at T2, giving 228,000. Inside the five-year plan, T5 adds 18,000 from year 2, T1 80,000 from year 3 and T4 75,000 from year 4. T2's lease ends in year 4 and its rent falls by 15,000 from year 5. T3's 70,000 gap is real but its lease runs to year 7, beyond the plan.
| Measure | Amount | % of passing |
|---|---|---|
| Gross under-renting | 243,000 | |
| Over-renting (T2) | −15,000 | |
| Headline reversionary potential | 228,000 | 10.6% |
| Not reachable in the plan (T3) | −70,000 | |
| Captured within five years | 158,000 | 7.3% |
The plan banks 69 per cent of the headline reversion, and the rent reaches 2,308,000 by year 5. On the 38,000,000 price, before purchaser's costs and non-recoverables, the gross initial yield is 5.66 per cent, the gross reversionary yield 6.26 per cent, and the gross yield on the year-5 rent 6.07 per cent. Those are quick cross-checks only: the net reversionary yield on the price including costs is a separate calculation that answers what the building returns at ERV, not how much of the uplift the plan can bank. The present value of the extra rent collected within the plan, at 7 per cent, is 340,352: a useful reminder that most of the reversion's value to a five-year owner arrives through the exit price, not the income.
| ERV per m² | Headline reversion | % | Captured in 5 years | % of passing |
|---|---|---|---|---|
| 275.5 (−5%) | 109,100 | 5.1% | 53,600 | 2.5% |
| 290.0 | 228,000 | 10.6% | 158,000 | 7.3% |
| 304.5 (+5%) | 346,900 | 16.1% | 262,400 | 12.2% |
Reversion is a geared number. A 5 per cent error in ERV halves the headline reversion and cuts the captured reversion by two-thirds, because the over-rented expiry gets worse as the under-rented reviews get smaller. That asymmetry is the upward-only review at work: it protects the landlord at review but not at expiry. A plan whose return depends on reversion depends, in practice, on the ERV evidence, which deserves as much scrutiny as the exit yield.
The common mistake is to take the headline 10.6 per cent, apply it to the whole rent roll and assume it is captured over the hold. That counts T3's gap, which no event reaches before the exit, and it treats every over-rented lease as if its rent will fall, when an over-rented tenant at an upward-only review keeps paying its rent; here T2's loss is real only because its lease expires in year 4. T3's reversion, two years away at the exit, shows up in the exit price a buyer pays, not in the plan's income. Build the reversion lease by lease, with the event dates from the WAULT and expiry profile, and quote the captured figure in the business plan.
Report both numbers. The headline reversionary potential describes the building; the captured reversion describes the plan. A ten-year horizon would capture the full 228,000 here, because T3 then expires inside it. The gap between the two numbers is a timing question, and timing is what the asset manager controls.
Reversionary potential is ERV over passing rent less one, 10.6 per cent here, but the plan can only bank the part reached by a review or an expiry before the exit, after upward-only protection and over-rented expiries: 7.3 per cent of passing rent. The free asset business plan workbook for the book computes passing rent, ERV and reversion from the rent roll, and the equivalent yield calculation shows how a valuer prices the same reversion.
The difference between the estimated rental value of the let space and the rent currently passing, expressed as a percentage of passing rent. On the illustrative office, ERV of 2,378,000 against passing rent of 2,150,000 gives 228,000, a reversionary potential of 10.6 per cent, before asking when each lease will let the landlord capture it.
Because the landlord can only move a rent at a review or an expiry, and only upward at an upward-only review. On the illustrative office, one 70,000 gap sits on a lease that runs past the five-year plan and one over-rented expiry loses 15,000, so 158,000 of a 228,000 headline reversion is captured, 69 per cent.
An over-rented lease is protected at an upward-only review, so the landlord keeps the higher rent, but the excess is lost at expiry. In the illustrative case one tenant paying 300 against an ERV of 290 costs 15,000 when its lease ends in year 4, which is why the net reversion of 228,000 is smaller than the 243,000 of gross under-renting.
This article is one calculation from The Real Estate Asset Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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