With record-low interest rates and a share market filled with volatility, commercial property has recently become an investment for anyone looking to park their cash and make some returns.
Although not every type of commercial property offers up decent yield in comparison to others if you’re investing and love cash flow, the asset type you purchase, and its location will be the difference in yielding high or low in return. Yield is the one obvious reason to invest.
So, what is yield?
The rate of return generated from a property is known as gross yield. It’s essentially rental income proportionate to its property value.
Net yield is slightly different. It’s based on the same calculation, but with overheads and outgoings like taxes, thrown into the mix. It’s also known as the capitalisation rate.
How do you calculate the yield of your property?
Financially speaking yield is the percentage term describing income that comes from an investment. In commercial property, the yield is calculated by dividing the rental income (annual), by the purchase price of the property. For example, a warehouse bought for $2 million with an annual income of $100,000 has a yield of 5.0% ($100,000 divided by 2 million equals 5%).
Yields can be high or low and are dependent on demand, location and property price. Demand is associated with economic factors like employment, consumer spending and business investment.
Many factors can affect the yield of a commercial property. When purchase prices increase, this can lower yields and is a recent observation in both Melbourne and Sydney CBD office markets. Increases in purchase prices typically mean there are highly active institutional investors looking for quality long-term investments.
Lack of demand for these types of commercial spaces can see property owners lowering prices to attract tenants, also lowering yields.
How essential is yield for property investors?
The significance an investor should place on yield rates is very much dependent on the market they are exploring. In commercial real estate, yield is crucial because higher capital growth rates are uncommon. Commercial property yield also carries more investment weight than residential yields. Yield is the main source of making money on commercial or industrial property.