Some floors are let. Some are empty. The seller says that once the empty floors are leased, the yield will be much higher. That may be true. But you pay the full price today, and the empty floors pay you nothing until someone signs a lease.
The short answer
In a part-leased building, work out the yield only on the rent that is actually being paid today. Then treat the empty floors as a separate project: estimate how long they may take to lease, what they cost you while empty, and what you will spend to get a tenant in. Add that cost to the price. Only then compare the "after leasing" yield with other options.
A part-leased building is not a bad investment. It is a different investment. Part of it is a rental asset, and part of it is a leasing job you are taking on.
Why it matters
A listing for a part-leased building often shows two numbers: the current rent and a "potential" rent once the vacant space is let. The gap between them is not income. It is a plan.
It also affects how you fund the purchase. Lease rental discounting (LRD) loans are sized on rent. Fact: PNB Housing Finance, for example, states on its lease rental discounting page that the loan can be up to 80% of the total future rent receivable within the unexpired period of the lease, subject to its own eligibility checks. Empty floors have no rent receivable, so they add nothing to that calculation.
How to look at it: split the building in two
Part 1: the leased floors. Judge these the way you would judge any pre-leased property. Who is the tenant? What does the lease say about lock-in, notice, escalation and residual term? Is the rent really being paid? If the building has several tenants, work out the WALE from the rent roll.
Part 2: the vacant floors. Price these as empty space that still needs work. Write down your own estimates for:
- Time to lease: how many months until a tenant signs.
- Rent-free period: new tenants often ask for time to fit out before rent starts. Read more on rent-free periods.
- Holding costs: maintenance, power, security and other running costs you carry while the floors are empty.
- Leasing cost: brokerage or fees to find the tenant.
- Repairs or fit-out support: what you may need to spend to make the space lettable.
The total of these is the cost of turning empty floors into rent. Add it to the price you pay. That gives you your real all-in cost.
If you are looking at a building like this and want a second view on the numbers, our team can go through it with you.
Illustrative example
Illustrative example. Not a real property or tenant. All figures, timelines and costs below are assumptions for explaining the method. Your numbers will be different.
A four-floor building is offered at ₹20 crore. Two floors are let. Two are empty.
| Item | Figure |
|---|---|
| Price | ₹20 crore |
| Rent being paid today (2 floors) | ₹6,00,000 a month = ₹72 lakh a year |
| Yield on rent actually paid | 3.6% |
| Seller's expected extra rent (2 empty floors) | ₹4,50,000 a month |
| "Potential" rent and yield | ₹10,50,000 a month = ₹1.26 crore a year = 6.3% |
Now cost the vacant floors, using assumptions:
| Assumption | Cost |
|---|---|
| 9 months to find a tenant + 3 months rent-free = 12 months with no rent from these floors (₹4,50,000 × 12) | ₹54 lakh |
| Holding costs while empty, ₹50,000 a month × 12 | ₹6 lakh |
| Leasing cost, assumed at 2 months' rent | ₹9 lakh |
| Repairs and fit-out support | ₹40 lakh |
| Total cost of leasing the empty floors | ₹1.09 crore |
Your all-in cost becomes about ₹21.09 crore. If everything goes to plan, ₹1.26 crore of rent on ₹21.09 crore is about 5.97%, not 6.3%. And in the first year you earn only the ₹72 lakh from the leased floors.
If leasing takes 21 months instead of 9, the lost rent alone rises by another ₹54 lakh. That is the risk you are being asked to carry, and it should show up in the price.
The VRX lens
Opinion: yield is not the investment thesis. A part-leased building needs all of it: tenant, lease, cash flow, asset, location, price and exit. The vacant floors are mostly an asset-and-location question. Will someone want this space, at this rent, in this market?
VRX observation: at VRX Capital, we work out every yield ourselves from the price and the rent actually being paid, rather than repeating the figure in a listing. We regularly see buildings offered with some floors let and others empty. The questions we ask first are simple: why are those floors empty, and for how long have they been empty?
A vacant floor can also be upside. If you buy at a price that reflects the empty space, and you can lease it well, you may do better than buying a fully let building. The point is to pay for what exists, not for what is hoped for. Our piece on yield vs IRR shows how to put the waiting period into your return.
Common mistakes
- Comparing the "potential" yield with the yield on a fully let property.
- Agreeing a price set on rent that no tenant has signed for.
- Assuming the empty floors will lease quickly without asking why they are empty now.
- Forgetting holding costs, leasing cost and rent-free time.
- Treating an LOI for the empty floors as a lease. An LOI is not a lease.
Checklist before you commit
- Yield calculated on rent actually being paid today
- Leased floors checked like any pre-leased property: tenant, lease, lock-in, residual term, payment record
- Reason the vacant floors are empty, and for how long
- Your own estimate of time to lease, rent-free period, holding costs, leasing cost and repairs
- All-in cost and "after leasing" yield worked out with those costs added
- A slower case: what if leasing takes twice as long, or the rent is lower?
- Whether the vacant space can be let on its own (access, services, approvals for the intended use)
- Loan plan based on current rent only
Approvals, lease terms and loan eligibility depend on the specific property and documents. Please verify them with a qualified lawyer and your lender before you commit.
FAQ
What is a part-leased building?
It is a building where some of the space is let to tenants and some is empty. You buy the whole building, but only the let part pays rent.
How do I calculate the yield on a partly leased building?
Divide the yearly rent actually being paid today by the price. Then, separately, estimate the cost of leasing the empty space, add it to the price, and divide the expected full rent by that all-in cost.
Should I pay for the vacant floors as if they were already leased?
No. Until a lease is signed, there is no rent, no lock-in and no tenant to judge. The price should reflect the time, cost and risk of getting the space leased.
Can I get a lease rental discounting loan on the vacant part?
LRD loans are sized on rent. PNB Housing Finance, for example, links its LRD loan to the future rent receivable within the unexpired lease period. Empty floors have no rent, so check with your lender what they will fund.
Talk to VRX Capital
If you are weighing a building with some floors let and some empty, we can help you separate the rent that exists from the rent that is hoped for. You can also see current listings, visit our investor page, or, if you own a building with vacant space, see our page for owners.
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