What factors determine yields on investment properties?

When purchasing a commercial investment property, the most common considerations are the location, quality of improvements and quality of tenant but what is the appropriate yield?

Every investor wants to achieve the highest possible yield, so let’s look at the factors that contribute to higher and lower yields.

Generally, the better the location, building and tenant, the higher its value and the lower its yield will be. This is because these attributes are high on everyone’s list of requirements and when a property matches these criteria, investor demand for that property will be stronger, inevitably leading to a higher sale price. This, in turn, lowers the yield.

In the current market, premium properties are selling for net yields of 5% or lower. However, some buyers are seeking higher yields. This doesn’t mean that properties offering yields of 7-8% or higher are not good investments – they simply satisfy an appetite for higher returns.

When pursuing a higher yield strategy, buyers should be looking for properties with characteristics that other buyers may overlook. For example, a property with a short lease in place to one or more tenants may put some buyers off. A location that is not considered ‘prime’ may be less appealing to some, or a small business tenant that does not have the appeal of a large multinational tenant may also be less attractive to unsophisticated buyers. Assessing and managing risk in these aspects can increase return dramatically.

If buyers are chasing higher returns, another option is to consider investing in regional locations where the quality of the tenant and building can be equal to high performing metropolitan investments. These properties can often be bought for net yields of around 6.5% or higher. Alternatively, strata titled properties can combine all of the most desirable qualities that investors look for, but can sometimes be acquired at attractive returns of more than 6% or 7% in strong locations.

So when searching for your next investment property, consider looking beyond the obvious if you are chasing higher returns.

Written by Dean Venturato, Director Burgess Rawson Sydney