Is There Any Logic in NOT Seeking a Commercial Yield For The Property You Purchase?

YOUR IMMEDIATE RESPONSE would probably be: “Why would you?”

However, what if you were planning to occupy the property, once the remaining lease term ends in a year or so? In which case, you might well be prepared to accept a below-market passing yield.

Also, what if there were an upcoming rental review, and the current figure was clearly below market?

Maybe you are just seeking a long-term, secure cash flow. And the property has an 8-year lease to a very strong tenant.

Alternatively, the property may have some upside for redevelopment – and the lease only has 6 months to run.

All of these examples would clearly justify you being prepared to accept a below-market passing yield on the initial purchase.

What about achieving an above-market passing yield?

Could there be circumstances when that’s actually possible?

Sometimes with older buildings properties, you can negotiate a better yield because:

  • The building is in need of some major renovation;
  • The current tenant will probably leave when the lease expires; or
  • The property has been “purpose-built” – with a limited appeal to the wider market. 

Or maybe, the property is tenanted for what is now a non-conforming use – and therefore could not be easily re-let.

Once again, these are all examples of where a vendor needs to compensate you for certain drawbacks that each of these properties may possess.

And the way that occurs is through you being able to purchase on an above-market yield.

Bottom Line: It’s important that you’re aware of the background to any sales evidence you might be using – when trying to establish the appropriate selling yield for the property you are currently looking to purchase.

Furthermore, you need to ensure the rentals for your comparable sales also reflect an appropriate market level. And that there is no potential for redevelopment built-in to that comparable sale.

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