Crisis-proof investments: low yield property is more profitable
Investing in property is a profitable and dependable venture but rising interest rates and an unpredictable global economy are making investors apprehensive. There are lessons to be learned from the
- Residential property has lower yields but rapid price growth.
- Retail property prices grow faster than office and industrial real estate.
- Low yields = fastest price growth among properties of the same type.
- Moderate yields in
low-risklocations have higher price growth. Low-yieldreal estate loses the least value during market crises.
- Price growth usually makes up for low yields.
Residential property prices grow faster than commercial
You are probably already aware that
|Property type||Annual yields, %||Price growth
Take Germany for example, which is a very attractive market for domestic and foreign investments at the moment. Yields on residential BTL are
However, residential apartment prices gained 5.0% in 9 months (
Choosing commercial property: shops, offices or industrial?
Even within the different commercial property segments, low yields triumph in terms of price growth. Take global retail property figures, average yields on high street retail premises are just 4.7%, yet prices gained 7.2% per annum since 2009. In comparison, office prices grew 6.3% on average per year over the same period with 5.0% yields, and industrial/warehousing prices saw 5.3% price growth for 6.8% yields.
Low-yield property prices grow faster
The attractive 8% gross yield property only gained 2.1% on average per year, while retail premises with a common 5.0% yield actually gained 5.5% in value every year over the last decade. Food for thought, right?
Low-yield property in good locations is crisis-resistant
Have you noticed that the more popular the location, the lower the yields? That’s because yields and price dynamics are interdependent for properties of the same type in different locations: real estate in popular markets has lower returns, yet prices grow faster.
Investing in commercial property requires a counterintuitive profit strategy, particularly one that is
When they compared rental rates and price dynamics for real estate in over 5,000 city districts in the USA over the last fifteen years, it also confirmed the
Between 2001 and 2015, average prices grew 5.5% per annum on residential property with 2.0% yields and just 2.7% on real estate with 10.0% yields. This means that
So if the market goes bad,
Price growth makes up for smaller yields
Yields and price growth tend to balance themselves out too, so being a conservative investor doesn’t induce any potential losses in earnings. If we compare residential and commercial real estate in 100 different locations across Germany, price growth makes up for reduced yield income everywhere (and these are conservative estimates).
According to Tranio research (see below), if net yields are 3%, prices grow 5%, and if the yields are 7%, price gain is 1% per annum. Either way, the cumulative returns on both options are roughly 8%, but the low yield property is less risky.
The problem with high risk is simple: it’s harder to rent when the market is bad. The consequences during crises are
Exceptions and conditions to the
There are some exceptions and conditions that apply. Over the
For example, the UK recently increased the Stamp Duty (tax on property purchases) and price growth on prime properties in Central London is to slow down. It could even be flat in 2016 according to Savills, a global real estate sales and lettings agent, while prime property elsewhere is set to gain 2%.
There are also some geographical exceptions. Midtown markets often have higher yields than central neighbourhoods and peripheral areas can demonstrate strong price growth in specific cases, like gentrification or urban renewal projects.
Remember that size matters: a supermarket in a small town could be
My advice to you
Look for a happy medium when it comes to your investment because nothing is guaranteed in life, but sensible
Yulia Kozhevnikova, investment expert, and Daria Buchneva, data analyst, Tranio