A headline yield divides gross rent by price. Multi-let and single-let industrial convert gross rent into net income at very different rates, before any risk premium.
Mostly because the same gross rent produces much less net income on a multi-let estate, not because investors demand a large risk premium. Convert gross to net line by line, management, vacancy, void costs, bad debt, re-letting and non-recoverable repairs, and price both at the same net yield. On an illustrative 1,500,000 of gross rent, a single-let warehouse and a sixteen-unit estate both priced at 5.50 per cent net are worth 25,153,218 and 20,173,647, and their gross yields sit 147 basis points apart with no risk premium at all.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Multi-let industrial estates trade on visibly higher headline yields than single-let distribution warehouses, and the difference is often described as a premium for management intensity and tenant risk. Some of it is. But before any premium is applied, a good part of the gap is just arithmetic: a headline yield is calculated on gross rent, and the two assets turn gross rent into net income at very different rates.
| Deduction | Single-let | Multi-let, 16 units |
|---|---|---|
| Management | 1.0% | 4.0% |
| Vacancy allowance | 0.0% | 8.0% |
| Rates and service charge on voids | 0.0% | 3.5% |
| Bad debt | 0.0% | 1.0% |
| Re-letting: fees, rent-free, works | 0.0% | 3.0% |
| Non-recoverable repairs and insurance | 0.5% | 1.5% |
| Total deductions | 1.5% | 21.0% |
Both assets let for 1,500,000 a year. The single-let unit is on a full repairing and insuring lease to one tenant with several years unexpired, so the landlord's leakage is a management fee and a little non-recoverable cost. The multi-let estate has sixteen units at an average rent of 93,750, short leases, and a steady turnover of occupiers. Both are priced at a 5.50 per cent net yield with purchaser's costs of 6.8 per cent.
Net income = gross rent × (1 − sum of deductions)
Value = net income ÷ net yield ÷ (1 + purchaser's costs)
Headline gross yield = gross rent ÷ value
In Excel, with deductions in B2:B7 and gross rent in B1: =B1*(1-SUM(B2:B7)) for net income and =B8/5.5%/(1+6.8%) for value. Build the deductions line by line from the estate's own history rather than applying a single percentage.
| Line | Single-let | Multi-let |
|---|---|---|
| Gross rent | 1,500,000 | 1,500,000 |
| Management | −15,000 | −60,000 |
| Vacancy allowance | 0 | −120,000 |
| Rates and service charge on voids | 0 | −52,500 |
| Bad debt | 0 | −15,000 |
| Re-letting | 0 | −45,000 |
| Non-recoverable repairs and insurance | −7,500 | −22,500 |
| Net income | 1,477,500 | 1,185,000 |
| Net as share of gross | 98.5% | 79.0% |
| Value at 5.50% net, after 6.8% costs | 25,153,218 | 20,173,647 |
| Headline gross yield | 5.96% | 7.44% |
At the same net yield, the multi-let estate is worth 4,979,571 less, 19.8 per cent, and quotes a headline gross yield of 7.44 per cent against 5.96. The 147 basis point gap is entirely the difference in how much of the rent reaches the owner. An investor who reads it as a risk premium and then applies a further premium for the same management intensity and void risk is counting them twice.
The reverse error is more expensive. Price the estate at the single-let's gross yield, on the grounds that the rent is the same, and you pay 25,153,218 for 1,185,000 of net income: a true net yield of 4.41 per cent after costs.
| Vacancy allowance | Void costs | Net income | Value | Gross yield | Gap to single-let, bp |
|---|---|---|---|---|---|
| 3% | 1.31% | 1,292,812 | 22,009,065 | 6.82% | 85 |
| 5% | 2.19% | 1,249,688 | 21,274,898 | 7.05% | 109 |
| 8% | 3.50% | 1,185,000 | 20,173,647 | 7.44% | 147 |
| 12% | 5.25% | 1,098,750 | 18,705,312 | 8.02% | 206 |
Vacancy is the line that moves the answer, because an empty unit costs twice: the lost rent and the rates and service charge the landlord pays on it. Each point of vacancy moves the gross yield gap by roughly 12 to 15 basis points. If the market then asks a genuine premium for multi-let risk, say a net yield of 5.75 per cent rather than 5.50, the value falls to 19,296,532 and the gross yield gap widens to 181 basis points, of which the premium accounts for only 34.
The common mistake is to compare headline yields across structures as if they measured the same thing. A gross yield is a ratio of contract rent to price, and it says nothing about how much of the rent survives management, voids and re-letting. Compare assets on net income at a stated net yield, and only then argue about the premium. When a seller's schedule converts gross to net with a single rule-of-thumb percentage, rebuild it line by line from the estate's service charge accounts, void history and arrears ledger: a schedule is almost always kinder than the ledger.
The same logic runs inside one building. A single-let warehouse coming off lease is about to become a multi-let problem for a year or two. For the occupier's side of that decision, see what an occupier will pay for a better building.
On the same 1,500,000 of gross rent, a sixteen-unit estate nets 1,185,000 against 1,477,500 for a single-let unit, and that alone puts their gross yields 147 basis points apart at an identical net yield. Price the net income, then decide on the premium. The free valuation and ageing asset workbook works the book's single unit against its fourteen-unit estate line by line.
Gross yield divides contract rent by price; net yield divides the income left after the landlord's irrecoverable costs, voids and re-letting. On an illustrative single-let warehouse 98.5 per cent of the rent reaches the owner, on a multi-let estate 79.0 per cent, so at the same 5.50 per cent net yield their gross yields are 5.96 and 7.44 per cent.
It should come from the estate's own letting history, not a rule of thumb. The choice matters: on an illustrative 1,500,000 estate, moving the allowance from 3 to 12 per cent, with void rates and service charge scaling alongside, cuts value from 22,009,065 to 18,705,312 at the same net yield.
Only partly. In the illustrative case 147 basis points of gross yield gap arise from gross-to-net leakage alone. Adding a genuine 25 basis point net yield premium, 5.75 against 5.50 per cent, widens the gap to 181 basis points, of which the premium is 34.
This article is one calculation from Logistics and Industrial Real Estate. 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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