Yield Compression

Yield compression occurs when cap rates decline, causing property values to increase even without income growth, driven by capital inflows and low interest rates.

Compression MechanicsExample
Initial scenarioNOI AED 1M, cap rate 8%, value AED 12.5M
Yield compressionCap rate falls to 6%
New valueSame AED 1M NOI / 6% = AED 16.67M
Value increase33% appreciation with no income change
CauseMore capital chasing same returns
ReversibilityYield expansion causes value decline


Drivers and RisksImpact
Low interest ratesBorrowing cheap, buyers pay more
Capital inflowsInstitutional money seeks real estate
Limited supplyPremium properties scarce
Economic growthConfidence drives investment
Risk: ExpansionRising rates cause cap rate increases, value falls
Timing importanceBuy when yields high, sell when compressed

Related Terms

Cap RateProperty ValuationMarket ValuationValuation FeeInterest RateMarket CycleCapital Flows

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