Investors love quick yardsticks, and the capitalisation rate (frequently known as cap rate) is one of the most popular. It converts a property’s net operating income (NOI) into a percentage return, letting you compare very different assets at a glance. Yet “good” is a moving target. Interest-rate cycles, rent growth, location and maintenance all push cap rates up or down, so the figure that makes sense for a Queen Street office will look high for a suburban duplex and low for a self-storage park.
Below is a practical guide to reading cap rates in 2025, framed for Kiwi investors looking to sharpen their decision-making.
Cap Rate Basics
Cap rate = Net operating income ÷ Current market value
- Net Operating Income (NOI) is annual rent less operating costs such as rates, insurance and basic maintenance.
- Market value is today’s price, not the historical purchase figure.
A property producing $60,000 NOI and valued at $1 million shows a 6% cap rate. In theory, a cash purchaser would earn six cents for every dollar invested during the first year.
The 2025 Benchmarks in Aotearoa
Recent research puts prime commercial yields (another term for market cap rates) in the 6.3-6.8% band, with industrial slightly tighter and secondary retail a touch softer.
On the residential side, gross rental yields an average of 4.2% nationwide, with Auckland apartments sitting closer to the 3.5-4.0% mark.
Typical 2025 cap-rate ranges
Asset type | Prime CBD | City fringe | Provincial Districts |
Office | 5.75 – 6.50 % | 6.25 – 7.25 % | 7.0 – 8.0 % |
Industrial / logistics | 5.75 – 6.25 % | 6.00 – 6.75 % | 6.5 – 7.5 % |
Large-format retail | 6.25 – 6.75 % | 6.75 – 7.50 % | 7.5 – 8.5 % |
Residential build-to-rent | 4.0 – 5.0 % (gross) | n/a | n/a |
Indicative only; individual deals can sit outside these bands.
Why Cap Rates Shift
- Interest costs
A higher OCR raises debt costs, so investors demand more income, pushing cap rates up. The Reserve Bank has already cut twice in 2025, signalling an easing cycle that should gradually compress cap rates during the next 12-18 months. - Rent growth expectations
If market rents look set to climb, buyers accept a lower initial yield, counting on income growth to lift the return. Industrial assets with tight vacancy and index-linked reviews often show the tightest cap rates for this reason. - Asset risk profile
Long leases to strong covenants trade lower than short leases to unknown tenants. Triple-net childcare centres, for instance, often settle near 6% cap rates despite being in secondary suburbs because they pass most costs to the occupier. - Location and liquidity
Central, supply-constrained areas usually price sharper than outer zones where vacancy and re-letting risk is higher. - Cap leakage
Office towers that need major plant upgrades every 15 years may look cheap at 6.5%, yet after lifts, chillers and tenant incentives the real cash yield can shrink to 3-4%. Always adjust NOI for probable capital works.
So, What Is “Good” in 2025?
A single number does not fit all, but the following guidelines help:
- Core commercial investors targeting steady income often accept 5.75-6.5% for prime property in Auckland or Wellington.
- Value-add buyers seeking upside via refurbishment or repositioning usually want 7% plus, compensating for execution risk.
- Mum-and-dad landlords in residential rentals gauge “good” by cash flow. Anything above local mortgage rates plus 1.5% is typically considered viable. With two-year fixed housing loans averaging 5.8%, that means a gross yield around 7.3% for stand-alone builds or 5% for apartments.
Key point: A “good” cap rate equals the minimum return that covers finance, compensates for risk and meets your strategic goal. For a low-geared trust seeking safe cash flow, 5.8% might be perfect. A developer hunting opportunistic margins will need 9% or more.
How to Use Cap Rates Properly
Compare like with like
Contrast only properties of similar age, location and lease profile. Mixing a CBD tower with a suburban warehouse blurs the risk story and makes the higher warehouse rate look artificially attractive.
Stress-test interest cover
Cap rate assumes an all-cash purchase. If you plan 60% debt, run serviceability numbers at current and +1% rates to check coverage.
Build a buffer for incentives and expenditure
Deduct realistic allowances for:
- Tenant incentives (office incentives can reach 40% of gross rent).
- Planned maintenance (office 0.6% of value; industrial 0.3%).
- Seismic or climate resilience upgrades if applicable.
Model exit
Cap rate at sale (the terminal yield) is seldom identical to today’s. A rising bond market or ageing building can widen the spread, eroding resale gains.
Limits of the Metric
- Cap rate ignores future rent growth, so two buildings with identical yields today may behave very differently once escalations kick in.
- It discounts leverage and tax settings. Full interest deductibility for investors was restored on 1 April 2025, boosting after-tax cash flow. Cap rate alone misses that benefit.
- It assumes stable occupancy. A retail strip with short leases can suffer sudden vacancy shocks, wiping out NOI and pushing the realised return far below the headline rate.
Hence, cap rate is a gateway metric, not a stand-alone investment thesis.
Cap Rate vs Gross Yield vs Cash-on-Cash
Measure | How it’s calculated | Tells you | Use it for |
Cap rate | NOI ÷ Market value | Income return before debt and tax | Asset comparison at a point in time |
Gross rental yield | Annual rent ÷ Market value | Top-line income ignoring costs | Quick scan of residential stock |
Cash-on-cash | Pre-tax cash flow after finance ÷ Cash invested | Equity return with leverage included | Testing deposit efficiency |
Smart investors track all three, then overlay debt structures, depreciation, and exit modelling for a full picture.
Turning Theory into Action
Cap rates in New Zealand are firming as borrowing costs ease and rent growth in industrial and well-located offices re-accelerates. The prime window for opportunistic “high-cap” buying is closing, although deals remain for those willing to tackle refurbishment, lease-up or secondary locations. If you are considering adding a property to your portfolio in 2025, treat cap rate as your initial filter, then dive into lease audits, building reports and finance options.
How Oliver Broomfield Can Help
Securing the right structure can lift your net yield by 25-40 basis points. My role is to:
- Source competitive funding from major banks, regional lenders and specialist non-bank providers
- Design interest-only, revolving-credit or blended structures that maximise after-tax income
- Stress-test serviceability and future refix points so you can buy with confidence
- Liaise with valuers and insurers to make sure the figures in your NOI are robust
Book a free 15-minute chat, and let’s test your next investment against current cap-rate bands and lending criteria.
