Understanding Commercial Property Yields Overall

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WHENEVER YOU CONSIDER Commercial property, it’s important to fully understand what the overall Yield is likely to be.

And the simple formula to arrive at an estimated overall figure is:

Yield = Income + Capital Growth

And investors often ask me … How do average Yields vary from one sector of the Commercial property market to the other.

The short answer is: “They tend not to vary at all”

Now on the face of it, that might seem a strange response. But remember, you are now talking about the overall Yield from the property — not merely the net return, as far as Income is concerned.

Long-term Expectations

From my experience, investors are anticipating an Overall Yield from their Commercial property (ie: income & growth) of around 12% per annum.

Overall Property Yields

Anticipated Overall Yields As this table explains … the composition of that Yield will vary between the sectors.

And yet when taken together, the total for those components is expected to remain the same, across all three sectors.

In other words, if a Retail a property is purchased returning 5% per annum … then, that investor is anticipating a 7% capital growth each year.

Alternatively, there may be the odd occasion where you can negotiate a “terrific deal” on an Industrial property, at around 11% per annum.

However, you need to realise that your capital growth will then most likely be down around 1% per annum.

And the reason you were able to achieve such a high Income return … was to provide you compensation for the anticipated meagre growth going forward.

Will there be Anomalies?

Of course, there will always be occasions where a vendor is caught in a tight spot; and that will enable you to snare a great deal. However, that will generally be the exception.

Also, you may have noticed some of the recent Retail sales in strip shopping centres occurring at extraordinary returns … as low as 3% net.

On the face of it, those investors are anticipating capital growth of 9% per annum. Unfortunately, that may turn out to be a fond hope — because of the present fragile nature of retailing.

Bottom Line: The table above is intended to provide you with a handy guide for calculating your anticipated overall Yield from Commercial property.

Furthermore, it also enables you to select your preferred risk profile.

In other words: Choosing between a higher income return, or higher growth. Or maybe, you decide upon the Office sector, to provide a more balanced portfolio.

Chris Lang

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