- Project plans
- Project activities
- Legislation and standards
- Industry context
Last edited 06 Aug 2018
In the context of property development, the term 'yield' generally refers to the annual return that an investor receives in the form of income, in relation to the amount of money expended to buy a property.
Yield is calculated by expressing the rental income of a property over the course of a year as a percentage of how much the property cost. For example, if the weekly rental on a flat is £150, the annual rental would be (52 x 150) £7,800. If the flat cost £70,000 to buy, then the gross yield is 7,800 / 70,000 (x 100) = 11.1%.
The gross yield figure does not take into account other expenses. The net yield is the income return on an investment after the deduction of expenses such as fees (e.g. stamp duty, solicitors, surveyors, letting and management), repairs and running costs (e.g. service charges, ground rents, buildings and contents insurances).
Net yield = (annual rent – operational costs) / property value
So, in the example above, if the operational costs are £5,000, then the net yield is (7,800 – 5,000) / 70,000 (x 100) = 4%.
An All-Risks Yield (ARY) is often used by valuers of commercial property to provide an indication of the likely risks apparent in a particular investment, and involves a holistic assessment of the condition of the property market.
Some basic principles must be followed when calculating an ARY figure:
- In a buoyant property market, yields generally fall because the capital value of property increases whilst the rent is likely to remain relatively static until rent reviews take place.
- In a falling property market, yields generally rise because rents stay fairly static whilst capital values fall.
Whereas property yields can be easily compared across a range of properties, capital values can only really be assessed by reviewing recent transactions of comparable properties in similar locations.
If a commercial office building is being let for £70,000 per year, and an approximate yield across similar properties is identified at around 8%, the capital value could be calculated as such:
Capital value = (annual rental income / yield) x 100
In this case, (70,000 / 8) x 100 = £875,000
The property yield figure can be manipulated to produce a different capital value that more accurately reflects the various investment risks. For example, a tenant who has good references from previous landlords and a strong credit rating may represent a low risk, whilst a tenant who is likely to default on rent payments or cause damage is likely to represent a higher risk.
 Related articles on Designing Buildings Wiki
- Base year.
- Business plan.
- Choice of method for rating valuation.
- Compound Annual Growth Rate (CAGR).
- Contractor’s basis for rating valuation.
- Cost-benefit analysis in construction.
- Development appraisal.
- Gross value added (GVA).
- Internal rate of return.
- Net Present Value.
- Relevant cost.
- Residual value.
Featured articles and news
Which room is the most fun to design? Find out the 'Grand Designs' presenter's unusual choice in our interview.
Full suite of speakers are announced for this year's BSRIA Briefing event.
Book your place for the Architectural Technology Awards 2018.
There are many ways of classifying types of building. Have a look at our range of building articles.
BSRIA have launched the 'major update' of the go-to design framework guide for building services.
How to get results with building life cycle assessment.
Government publishes a prospectus inviting proposals for new 'garden communities'.
The Morandi motorway bridge in Genoa collapses during rainstorm while undergoing maintenance works.
'Developed design' is a phrase coined by the RIBA for their 2013 Plan of Work. But what does it actually mean?
New green paper published aiming to rebalance the relationship between landlords and residents and tackle stigma.
RIBA calls for a comprehensive ban on combustible materials.