Written by: John Padgett on Thursday 05/11/2015
At its most basic, commercial property yield can be represented by the following:
Yield = Income + Capital Growth
But, in reality, arriving at an accurate figure for commercial property is considerably more complicated than this simplified equation suggests, and much more problematic than finding yield for a residential property, especially during turbulent economic times. In the case of commercial property, there are many more factors to take into account.
Which is why, before making any decision regarding a commercial property acquisition, you need to recruit an experienced professional to help you ascertain property value and, subsequently, derive an informed figure on potential yield.
To begin with, when it comes to commercial property yield, it’s necessary to understand that your return on investment comes from two sources: rental income and the capital value of the property. Which is why so many investors in commercial property see these investments as long-term ventures.
It’s up to a valuation expert to help you establish this figure. Obviously, property value is a major factor, but there are many other factors at play also, such as the condition of the property, its location, whether or not a tenant is already in situ and to an extent, how financially successful that tenant is in their operation at the premises.
Economics factors in the wider market will affect also yield. Yield will increase when there are fewer properties available, or when finance to acquire these properties is cheap and readily available. Similarly, when investors sense rental growth as the result of an upturn in the economy, or there’s a change in legislation, such as a new government incentive, all of these variables can affect yields in the commercial property sector.
It’s also worth pointing out that not all commercial property is the same. Within general investment property, you have the individual categories of retail, office and industrial commercial property, all of which come with their own pros and cons.
Then there’s development land, which operates much differently to investment property. As it has not yet been built upon, a developer’s margin will need to be assumed and considerable more market knowledge will be needed to make an assessment when it comes to yield. Planning issues, construction complexities, local authority levies and regional issues all conspire to make determining the sales values for commercial units notoriously difficult to predict. Developing land can be a very high-risk venture, so this risk needs to be accounted for within the yield assessment.
Moreover, there will always be anomalies in commercial property yield that only an experienced professional can understand. No one individual can be an expert in all of these variables associated with commercial property, so it’s important to get advice from a team with the track record and in-depth knowledge of the specialist areas involved in commercial property yield.
Find out more by talking to the people at Eddisons here.