Yield Movements

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Yield Movements. When you’re looking to purchase property you might be looking around the internet for some advice. You see one advisor talk about, “Buy cash flow. Only look at that, the yield.” And then, maybe you see another advisor talk about, “Don’t look at high yielding property, consider growth, because the high yielding staff won’t get you growth.” But, one thing that’s actually missed out in this whole conversation is yield movements.

Yields are basically the income divided by the property price itself, and when you find that annual income divided by that you get a percentage, and that’s your yield percentage, and so, when you’re considering yield, what is high yield? Because, sometimes that’s actually distorted in what that actually means. Some people consider high yields of five to 7%, because they might be sitting in a city where it yields two to 3%, example being Melbourne and Sydney.

Some people might think you have to go extremely regional, and high yields mean 8% plus. Now, each of the properties carry their pros and cons, but the word high yield is so broad that sometimes it’s actually misinterpreted. When it comes back to yield movements what you’re actually looking to do is, let’s look at the psychology, and the shift that’s happened when there’s been certain places that used to be priced here, and now are priced here. Perhaps they had yields that were here, and now they have yields here. 

So, going back to the Sydney example. Let’s take a suburb up west. I live in a place called Glenwood, something new some of you may have learned today, but Glenwood is in the western suburbs of Sydney, northwest to be precise, and about 10 years ago the Median house price for a three or four bedroom home was around 500, or just about 500, 000, now close to a million dollars. That’s a big difference, so when you’re going through that you can actually see A, there’s been a huge price change over the 10 years, that double to some extent, or close to it, but at the same time what’s being missed out is the yield movements. 

Let’s talk about 2009. In that 2008-2009 period yields in Glenwood were above 5%, and some even above 5.5, and some close to 6%. You may now be wondering, “Those deals are quite high.” Well, actually those yields have moved. Now those yields are sitting between two and a half to 3% roughly in that suburb, so if you’re looking back you would have said, “Why would you buy out there? The cash flow’s high, the yield’s high. You don’t wanna go there, you wanna go inner, the yields are much better.” You would have avoided that whole suburb as a whole perhaps based on that mythology.

But, as time has gone on, and between Sydney here, and that northwest area there has been population rises, supply rises, and that whole supply to demand, and sentiment which is how people feel about the area has started to change as time has gone on, so when you’re considering that, that straight away is gone from the property that, “That yield is too high, that’s too far out, I wouldn’t buy there.” To now being, “Well, that’s a nice suburb to live in, that yield is low. Is that one of those Growth Properties, because the yield is so low?” No, that’s just been yield movements, because the price has moved faster than the income.

So, when you’re making these considerations, yes you can have that forever debate of yield versus growth, but just because something has a higher yield A, what is defined as high yield could be different to each person viewing it, and B, time, and time, and time again, we’ve seen places move from middle to outer rings, or certain areas where population and demand has expanded, yields were higher at one point, but the yield movement has come down. Now, this example goes even beyond residential property. It actually even goes to commercial property.

Here’s two types of commercial properties out there, warehouses, medical centers or medical facilities. These healthcare assets, and warehouse assets were yielding eight, nine, 10, 11% sometimes and beyond net, but then as export goods, certain sales in the warehousing space that required that as well as the aging population, and the security of healthcare assets in terms of commercial properties started improving, the yield started to come down, prices started to go up, so these things happen, because that price out paste the yield movements, and suddenly something that was once, “That’s a cash flow, that doesn’t grow.” Has started to become, “This is now a growth asset.” Whereas you could have picked it up at a different time.

So, that’s an example of yield movements both from residential property, and commercial property, and can help you explain that it isn’t always about differentiating cash flow or growth, it’s about understanding properties that may be in these areas that can get in at a certain time, and can potentially have that growth through time and market. That’s it from us here at InvestorKit, the experts in wealth creation helping you take action.