Cap Rate (Capitalisation Rate)
Definition
A cap rate expresses a property's net operating income as a percentage of its value — the yield an investor buys at. Lower cap rates mean higher prices per pound of income; the spread between coliving cap rates and established sectors like build-to-rent reflects perceived operational risk and track record.
The formula
Cap rate = Net operating income ÷ Asset value
- Net operating income
- income after operating expenses, before debt service and capital costs
- Asset value
- market value or transaction price of the property
Worked example
A stabilised building producing £340,000 of net operating income.
- 01At a 4.25% cap rate: £340,000 ÷ 0.0425 = £8.0m implied value.
- 02At a 5.00% cap rate: £340,000 ÷ 0.0500 = £6.8m implied value.
The same income is worth £1.2m less at the regional yield than the prime London one. Every pound of durable NOI is worth roughly £23.50 at 4.25% and £20 at 5.00% — which is why NOI discipline compounds into value far faster than it looks on a monthly P&L.
Benchmark
4.25% prime London · 5.00% prime regional
Prime net initial yields for co-living as published November 2025, against 3.90% for prime Zone 1 build-to-rent and 4.50% for prime London student accommodation on a direct let. Basis: optimum-sized income-focused transactions of prime, stabilised, institutional-grade assets.
Cap rate is how the market prices buildings, and it is the reason operators are told to protect net operating income rather than revenue. A pound of recurring cost removed from the P&L is worth roughly twenty-three pounds of value at a 4.25% yield — the arithmetic that makes operational discipline a capital decision rather than a housekeeping one.
Yield-on-cost is the developer's cousin of the same measure: stabilised NOI against total project cost rather than against market value. It answers whether creating the asset was worth it, where the cap rate answers what the market will pay for it once it exists.
Coliving currently prices 35 basis points wider than prime Zone 1 build-to-rent in London, and that spread is compensation for operational intensity and a shorter institutional track record rather than a free return. It also has room to compress as the sector matures, which is the value-creation thesis behind most development happening now — a bet worth modelling as one rather than assuming.
The common mistake
Applying an institutional yield to a single house
The published yields describe prime, stabilised, institutional-grade assets in optimum-sized transactions. A converted six-bed HMO in a regional town does not price on that curve, and valuing one that way produces a number no buyer will honour. What the institutional yields are genuinely useful for is the relationship between sectors, which is the question a committee actually asks.
Frequently asked
What cap rate does UK coliving trade at?+
Prime London co-living was published at a 4.25% net initial yield and prime regional at 5.00% in November 2025, both stable through the year. Those figures describe prime stabilised institutional-grade assets, not individual converted properties.
Is a higher cap rate better?+
It depends which side you are on. A higher cap rate means the market pays less for each pound of income — good if you are buying, bad if you are selling or refinancing. It usually signals higher perceived risk, less liquidity, or a shorter track record.
UK Living Sectors Yield Benchmark
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Raising capital for a coliving business
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