Yield on Cost
Definition
Yield on cost is a development metric: the stabilised net operating income a project produces divided by its total cost to build or convert. Comparing it against market cap rates shows the value created (or destroyed) by developing rather than buying stabilised.
The formula
Yield on cost = Stabilised NOI ÷ Total project cost
- Stabilised NOI
- net operating income once the building has reached steady-state occupancy
- Total project cost
- land, construction, fees, finance during build, and lease-up cost
Worked example
A scheme with a total project cost of £7.4m and stabilised NOI of £420,000.
- 01Yield on cost = £420,000 ÷ £7,400,000 = 5.68%.
- 02Exit yield for prime regional co-living, November 2025: 5.00%.
- 03Development spread = 5.68% − 5.00% = 68 basis points.
The scheme creates value because it produces income at 5.68% against a market that prices that income at 5.00%. Implied value at exit is £420,000 ÷ 0.05 = £8.4m against £7.4m of cost.
Benchmark
5.00% prime regional · 4.25% prime London
Published co-living net initial yields, November 2025 — the exit assumption a yield-on-cost calculation has to beat to justify the development risk.
Yield on cost is the developer's measure and cap rate is the market's. The gap between them is the development spread, and it is the return for taking planning, construction and lease-up risk. Where the spread is thin, the honest conclusion is often that buying a stabilised asset is a better use of the same capital.
In UK coliving the spread has to survive a specific hazard: construction slowed sharply after the 2024 planning surge, with development volumes down roughly a third in 2025 and homes under construction down 48% year on year by the second quarter of 2026. Programme risk is currently a larger part of the equation than it looks in a base case.
The compression thesis — that coliving yields tighten toward build-to-rent as the sector matures — would improve exit values and is the argument behind much of the development happening now. It is a bet. Model the scheme so it still works if the spread stays where it is.
The common mistake
Leaving lease-up out of total project cost
Lease-up is a cost, not a delay. A first building in a market where you have no brand does not fill on the timeline a spreadsheet assumes, and the revenue lost during ramp-up never comes back. Our planning assumption is that lease-up costs a full quarter of revenue that should be carried in project cost — leaving it out inflates yield on cost by exactly the amount you are most likely to be wrong about.
Frequently asked
What development spread justifies a coliving scheme?+
That depends on your cost of capital and the risk in the specific programme, and we would not publish a single number as though it were universal. What is not negotiable is that the spread must be calculated against a realistic exit yield and a total project cost that includes lease-up.
How is yield on cost different from cap rate?+
Yield on cost divides stabilised income by what it cost you to create the asset. Cap rate divides income by what the market says the asset is worth. The first tells you whether building it was worthwhile; the second tells you what someone will pay for it.
UK Living Sectors Yield Benchmark
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Coliving vs build-to-rent
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