In commercial property, are yields calculated simply as rental income over asset prices?

Question

Or does yield include both rental income and capital gains in a period

Answer 1

Yes.

In the commercial sector, prices are not rising as they are in (some parts of) the private sector. In fact, often offices may actually depreciate (as they become older, unsuited to modern usage eg. cabling, air-con etc. and in need of refurbishment)

Answer 2

There are different methods.

With the direct capitalization method, you just divide the first year's NOI by the price you paid for the cap rate.

With the discounted cash flow method you would find the present value of the cash flows from your holding period including the reversion (amount you receive from selling).

Edit: I meant when you are valuing the property. Do you mean your rate of return? Then you would just divide the (present value of all year's NOIs added up -price paid + present value of proceeds from sale the end of your holding period) / price paid.

So yes, it would include your capital gain also. Then you can also take into account income and capital gains taxes if you like.