Yields

Question 1

What would be a typical yield for farmland under an FBT?

Answer 1

1-2%

Eg.
£120 per acre x 200 acres = £24,000 pa

200 acres x £10,000 per acre = £2,000,000 CV.

£24,000 / £2,000,000 x100% = 1.2%

Question 2

What would be a typical yield for a 3-bedroom cottage let on an AST?

Answer 2

2-3%

e.g. Capital value £850,000
Rent £22,200 pcm
= 2.6%

Question 3

What would be a typical yield for a high street shop in Horsham?

Answer 3

7-8%

e.g. KFC Capital value £750,000
Rent £55,000 pa
= 7.3%

Question 4

What would be a typical yield be for an equipped farm house, buildings, and farmland under an AHA?

Question 5

Why do yields differ?

Answer 5

Risks associated with different property types vary, as does the covenant strengths of lease agreements, demand for different types of property, and market conditions which affect value.

Question 6

Name some factors which affect commercial property yields.

Answer 6

• Location
• Tenancy / Occupation
• Lease Term
• Covenant Strengths
• Infrastructure & Services

Question 7

How and why do bank interest rates affect commercial property yields?

Answer 7

High bank interest rates = higher borrowing costs = higher yield to justify the investment being made.

Question 8

What are the three main types of yield and how are they calculated?

Answer 8

1) Gross Yield - The annual rent divided by capital value.

2) Net Yield - total yield after all expenses have been taken away for repair, maintenance, agents costs, insurance, etc.

3) All Risks Yield (ARY) - Incorporates both gross and net yields, includes forecasting of markets and demands, and some unrecoverable costs. Generally Rent / Capital value, and then deductions as necessary.

Question 9

In detail, explain how you would do an investment valuation.

Answer 9

1. Establish passing rent and market rent
2. Establish existing lease term and any rent reviews and reversion dates
3. Value the term using Years Purchase for a term of years at a stated % yield.
4. Value any additional terms following rent reviews, and defer that YP using PV £1 in x years time at a stated yield.
5. Value the reversion using YP in Perpetuity at a stated yield, deferred using PV £1 in x years at a stated yield.
6. Add together the values of the term and the reversion to produce the capital value.