Experienced investors can attest that the yield of a commercial property is a vital element in gauging the potential productivity of that investment. As you are well aware, that yield — or for that matter rental yield — is the return you expect to make from a property you anticipate to buy or own. In order to measure the potential value of their commercial property investment, landlords and property investors usually utilize yield. A prudent investor usually sets a target yield and later closely follow which investments will meet the target. However, the proportion affecting the yield that an investor can get out of a particular commercial property investment is usually affected will several factors.
Location
In any property investment, location choice is usually a strategic factor. Properties that are located in a place where there is accessibility to transport, high location visibility, high accessibility to potential customers, and near similar commercial properties usually attracts a higher yield than those in an area where these variables are low.
It is also common for average rent and property prices to vary from region to region, town to town, and city to city. Therefore, the yield will also vary across Australia such that the property yield in a place like Sydney may differ from the yield of a property located in Canberra. Due to the high business environment in Sydney, the yield is expected to be higher than in Canberra. Thus, location is an important factor to consider when carrying out any yield calculations.
Lease Term
The type of commercial properties that investors can choose to put their energies on depends on the lease term. Short term rentals, especially a peer-to-peer lease, usually fetches a higher yield for an investor as it comes with a premium. Even if the rentals on such properties are high, short-term home renters or holidaymakers usually find them with great privacy, spacious and independent compared to the hotel rooms.
Long-term contracts or normal yield properties will attract a fairly low yield level. Leased properties that have short-term rents, whether daily, weekly or monthly, usually experience a significant rise in yields. People who go for short-term rentals find it cheaper to pay a premium to enjoy the same facilities as a hotel room like internet connection, parking services, nicely maintained spaces and fully-furnished units.
However, with that said, proper management needs to be done to get a frequent guest turnover. There are various real estate firms and property developers out there that out there that can help unit owners maintain leases and realize high yield levels.
Interest rates
Interest rates are one of the factors that affect two variables in yield determination; income and property cost. On one hand, a rising interest rate can indicate the economy is steadily growing to imply an increase in occupancy rate and rent. On the other hand, an escalating rate causes the cost of acquiring a commercial property to increase. Therefore, property investors should examine the ways that they can offset the negative reactions that an interest rate rise can cause.
Interest rates fluctuations directly affect properties costs. A decline in interest rates acts as an incentive for various investors to engage more in the commercial property market. In such a scenario, a more affordable commercial financing is usually available to acquire additional commercial property. Since an interest rate fluctuation reduces property costs it will thus increase the amount of yield you can get from a particular commercial property.
However, when interest rates rise, investors will not be influenced to engage more in the commercial property market. Most investors will not want to get commercial loans causing a situation where there is low commercial property acquisition. Therefore, as interest rates escalate, commercial properties will become costly thereby diminishing property yields.
Tenancy
Tenants are a crucial element in any commercial real estate investment as they are the ones that provide the income. There are various kinds of tenants that occupy commercial real estate properties like, retailers, manufacturers, office businesses, and multifamily. Therefore, manufacturers, industrial clients, give a lot of income and their yield is higher than office businesses and retailers.
However, in a particular commercial property type, the yields also tend to vary. For instance, large anchor stores tenants like Best Buy and outlet mall tenants generate higher yields than small shopping centers and single-tenant retailers.
Infrastructure
The kind of infrastructure around a place can determine the yields that a property investor can obtain. Infrastructure is basically the things that enable various essential services to continue so that there are productivity, employment, and economic growth. Some of the common infrastructures that exist in a place are social facilities such as hospitals, universities, schools, and other community facilities; utilities like water distribution, waste management, gas, and electricity; transport structures like rails, roads, bridges, ports, and airports.
Regions or places that have adequate infrastructure like best rail services, and water distribution will usually generate high yields for property investors. Likewise, those areas that have an upcoming infrastructure like a road upgrade going on will also attract fairly good yields. However, when it comes to areas and places where there is the poor quality of infrastructure or lack some infrastructure will generate low yields.
Economic environment
The economic sphere of a place can really determine the amount of yield a property investor is able to get. In places where the rate of businesses operating there is high, there is usually a high demand for commercial spaces. Due to the demand to acquire a favorable commercial space where a business can carry out various activities being high, the spaces are usually scarce. Therefore, in such areas, commercial property owners will have to charge high rents which will translate to high yields.
While in areas where the level of businesses is low like away from major cities, commercial spaces demand is usually very low. A business owner who wants to conduct various activities will find more spaces for doing the task. It is common to find rents in such places fairly low which implies that the yields that property investors get are fairly low.
To cap it up
When a commercial property investor is looking for a good yield out of the properties, the discussed factors above are usually a good litmus test for investment. Even though the commercial property investment strategy can be the same but the location, lease term, interest rates, tenancy, infrastructure and economic environment will bring the variance in the potential yields that can be realized.
