What is yield and why is it important?


Sharon Taylor

Yield formula

 

Yield is a measure of return on an investment, expressed as a percentage of the purchase price, usually on an annual basis. In this instance the investment is residential property;

How is Yield Calculated?
Annual Rent / Purchase Price
($400 per week x 52) / $450,000
Yield = 4.62%

In our research at Performance Data we calculate yield as an average figure for a house and a unit in every suburb in Australia – we also calculate this figure for each city and regional town. We use data from the following sources; State Government Department of Housing, Real Estate Institute, APM, RP Data, ABS, BIS Oxford Economics and SQM.

As above, gross yield is calculated using income prior to any expenses being deducted. Net yield on the other hand, is calculated deducting expenses such as management fees, insurance, rates, land tax and maintenance cost from the income. With residential property, net yields are approximately 1.5% - 2% lower than gross yields. Largely, when yield is spoken of in residential property terms, it is gross yield that is being referred to.

Typically, residential property in the five major capital cities will have a much lower yield than regional centres. Sydney and Melbourne currently have the lowest yields in the nation at 2.8% for houses. Regional yields range from 4.5% plus.

Why is yield important?

Investors need to be aware of the potential yield before committing to their purchase. The yield will effect borrowing capacity, serviceability and possibly the ability to hold the property long term if there is no buffer in place.

By calculating backwards, knowing the average yield of the suburb you’re considering purchasing in can help you determine the appropriate purchase price of a particular asset and prevent you from overpaying.

When looking to purchase an investment property determining ways to value add can increase the potential yield. This can include, adding an extra bedroom, renovating the kitchen or bathroom or adding an outdoor entertaining area. A solid knowledge of the rental market is required to determine the return on investment.

The yield and its trend (upward or downward) in a particular city or region can be an indicator or what stage of the cycle the market is in. Typically, a low yield on a downward trend, such as in Sydney and Melbourne will see that market towards the top of its cycle. Conversely, rising yields can indicate a market that is approaching the bottom as oversupply is absorbed and rents begin to rise.

Yield is an important indicator when assessing a market and individual assets within a market. However, as with all indicators, it should not be studied in isolation and decisions should not be made solely on yield.

 

Sharon Taylor
Senior Research Analyst - Performance Property Advisory

Sharon heads up the research division at Performance Property Advisory. As part of our ongoing service to clients, Sharon provides contemporary advice in a range of areas, including growth suburbs and regions, demographics and employment rates, proposed infrastructure developments and other aspects that will contribute to a positive return on their investment.