Worldwide: Crisis-Proof Investments: Low Yield Property Is More Profitable

Last Updated: 14 April 2016
Article by Yulia Kozhevnikova and Daria Buchneva

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 '07–'08 crisis, especially from those who are still profitable. What many first-time investors don't know, is that yields are the key to their success.

Key points
  • 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-risk locations have higher price growth.
  • Low-yield real 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 buy-to-let (BTL) residential property has "low" yields, but that's no reason to write it off. In fact, prices grow faster on this type of property, contrary to, say, industrial/warehousing, retail and office real estate.

German property: a textbook example

Property type Annual yields, % Price growth Q1–Q3 2015, %
BTL residential 3.0–5.0 5.0
Commercial 4.0–7.0 1.5–2.0

Take Germany for example, which is a very attractive market for domestic and foreign investments at the moment. Yields on residential BTL are 3.0–5.0% per annum on average, compared to 4.0–7.0% on retail, industrial and office property.

-> Germany needs 50% more homes to house migrants

However, residential apartment prices gained 5.0% in 9 months (Q1–Q3 2015) according to the Association of German Mortgage Banks (Verband deutscher Pfandbriefbanken), while commercial property only grew by 1.5–2.0%.

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

This yield-to-price rule even holds true for competing property within segments too. Over the last decade in Germany's 60 main cities, high-yield property consistently underperformed in terms of price dynamics within the retail property segment.

-> Commercial property investments soar in Germany's "Big Seven" cities

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 crisis-resistant. Low yields are the key to this strategy, because they are the product of high demand and rising prices.

Low-risk and low-yield locations (generally, prime and downtown districts in large cities) get more expensive faster than their higher-risk and higher-yield peers. This is true of most big property markets, including the US according to our Tranio research based on data from Zillow, America's top property portal.

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 yield-to-price relationship.

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 low-yielding real estate lost the least value despite the 2007 crisis. Even in the worst-case scenarios, residential property with 2.0% yields gained at least 3.5% in value, while prices of property earning 8.0% yields lost up to 0.4 % per annum and even –1.0% per annum where yields were 10.0%.

So if the market goes bad, low-yield property will lose less value and the price will rebound faster than a high-risk, high-yield investment.

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 two-fold: you could lose your revenue if your property is empty and it could lose value too.

Exceptions and conditions to the yield-to-price rule

There are some exceptions and conditions that apply. Over the short-term (1–2 years), price dynamics and yields can be affected by a number of issues like changing laws, rising interest rates or the phase of the property cycle.

-> Property cycles: how to choose the best moment to buy property

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.

-> Europe's top five urban renovation projects

Remember that size matters: a supermarket in a small town could be a low-risk investment (it's unlikely to attract bigger competition) bringing in steady, low yields. However, the property value will not rise as quickly as in the city because there is less demand for real estate.

My advice to you

Look for a happy medium when it comes to your investment because nothing is guaranteed in life, but sensible decision-making is free. Remember, a low-yield property is not always a guarantee of price growth, nor is a high yield necessarily the most likely to lose value. From my experience in 2015, 5–6% yield (net rental income/property value) is a good target with a loan at 2% interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions