Last edited 06 Aug 2018

Yield

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.

The term ‘prime yield’ is used in situations where a benchmark situation is achieved through an excellent tenant and a very high quality building.