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High yields on real estate: where to find them and what to know

The current state of capital and commodity markets has investors seeking new horizons to balance their portfolios and generate revenue, and often they want overseas property with high yields. However big returns come with big risks, so it's worth investigating before investing.

Yields and risks are interdependent: lower risks come with lower yields and vice versa. Furthermore, every investment property is unique, which makes it particularly difficult to compare options in terms of risks that can be economic, political or linked to things like location, lease agreements, etc. So far, the most reliable tool for evaluating risk is to assess the yields.

Yields in Europe, %

2–3 low
4–7 optimal
8−12 high

“Exotic” property segments

After the 2008 crisis, low borrowing costs enticed overseas investors onto the commercial property market. Combined with enhanced competition, it pushed buyers towards less developed commercial property segments like retirement homes, student accommodation, industrial and warehousing property, even art galleries and cinemas. Between 2012 and 2015, investments into these more “exotic” vehicles in the UK (e.g., cinemas, bowling clubs, exhibition centres, theme parks, etc.) grew from 5% to 14% according to CBRE.

Yields on these properties depend on the location. They range from 5% to 8% on average, depending on both rental revenue and competent business management.

The risks involved with such investments are obvious: finding tenants for a one-bedroom flat even on the outskirts of London is much easier than finding an occupant for an art gallery in Mayfair. Additionally, specific types of property (e.g., recreation or logistics) require investors to have a firm grasp of the business they are getting into, compared to, say, residential property or office space rentals.

Peripheral real estate

In certain situations, office space and flats can also have high yields linked to high risks, which is usually due to the location. For instance, in America’s biggest cities, office space is a low-risk and low-yield asset. Yields and risks are higher outside of these locations.

Yields on office property in major US cities, %

City Yield
Downtown Manhattan
(New York)
3.3–3.8
San Francisco 3.0–4.0
Seattle 4.5–5.5

The highest yields for offices in America are in Detroit (9.5−10.5% on average), but this city is also famous for declaring bankruptcy recently, demonstrating the clear link between yields and risk. This situation can be observed in areas on the periphery of successful locations. For example, average office space yields in New Jersey (neighbouring New York) reach 7.0-7.5%.

Economically depressed regions are more likely to lose tenants and never find others because demand has dwindled. The best way to predict future popularity is to seek out new infrastructure projects that will add value to the property like a future metro station or transport line, sports facilities or an educational institution.

Short-term rentals

Conservative investors often prefer long-term tenants because they plan for long-term revenue and accumulation of capital. This strategy is common in Europe where residential rentals earn about 2−3%. Using the property for short-term holiday rentals can leverage yields, but also risks.

"In Budapest, yields for long-term rental flats are 3.5%”, says Vladislav Boychenko, investment expert at Tranio. However, if you use this property as a holiday rental (from one day to a week), you can achieve net yields of 7–10% because short-term rentals command higher rates".

At the same time, the risks are also higher: finding tenants for a holiday rental presents its own difficulties and if the property is empty, revenue declines. To minimise risk, investors can use the services of professional management companies. This costs 20−25% of the total rental revenue, but these expenses will be rewarded with higher occupancy rates. If managed professionally and assessed properly, a property can have occupancy rates of up to 90% in peak season and 60% in low season.

Illiquid property

Property that does not command strong demand has low liquidity, like filling stations, parking garages and warehouses.

Prices and demand for high-yield property are often volatile, as they are more affected by the economic situation than the most "popular" assets like residential or commercial property. For example, according to CBRE, in Russia the highest yields for logistics and distribution properties are 12.75%. However, in 2015 the retail turnover in Russia declined by 10% and the cargo volume fell by 5%. Now, 10% of warehouses are vacant, compared to 2% before the crisis.

Investors are more likely to compete with industrial monopolies that manage a network of similar properties, making it difficult to get a good deal. In this situation, the investor can raise liquidity artificially by repurposing the building but the associated costs can be higher than the losses linked to vacant property or reduced rental rates.

Long-term prospects

Investors inevitably assume high risks to achieve high gains from real estate and these can’t be reduced by extra financial or time expenditures.

-> Crisis-proof investments: low yield property is more profitable

From the point of view of Tranio.com, all high-yield properties mentioned in our review have one significant disadvantage: price growth is slower and risks are higher on these properties, compared to real estate with low yields. For investors with small portfolios, residential or commercial property with average or relatively low yields remains the optimal decision.

Ivan Chepizhko, Tranio

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    Tranio’s managers offer advice on buying real estate overseas
    Anna Boyarchukova
    Anna Boyarchukova
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