Making sense of yields

Jan 09, 2012

The festive season gives us good opportunity to amply consider many things. This year, after the pavlova was consumed, and before we settled on the resolutions for the new year, I started to think about property yields – and more particularly why they are at the level they are.

I tend to discount residential property from any meaningful yield discussion. Too often “investment” in this form of property is not driven by yield at all. Emotion, tax, and potential capital gains all make a mockery of residential being a yield driven investment. And even with the recent changes to LAQC and the rest, I don’t see too many changes in the way many “mom and pop” view residential property.
In considering other types of investment property – office, retail and industrial, yield comparisons are  interesting and don’t always make a lot of sense. It seems obvious that there should be a relationship between interest rates and property yields. After all, we all have a choice where we invest, and relatively liquid investments will move between differing forms of investment. And that yields for a new, high stud, tilt slab warehouse should be markedly different from older sheds. We also understand the argument that longer leases are more attractive than shorter, and supposedly “blue chip” (although we are a little confused as to what that means) tenants are better than one man and his dog in a barn.
 
What I do find somewhat confusing is that the concept of utility seems to be seldom factored into yields. Commercial buildings are not houses. As long as it is not located in a depopulating ghost town, and with an increasing population, renting houses is usually a case of getting the price appropriate for the property. People need a place to live. Commercial buildings are a very different story. Whilst they are price sensitive, and leases are longer than on residential, there are far fewer potential tenants, and, even then, those tenants have specific space requirements. Generally a freight forwarder doesn’t want a strip retail store, or a bank an industrial unit. Accordingly I take the position that buildings with greater “utility”, or the ability to be of use to a larger number of potential tenants, should have greater value than buildings which have a very specific use.
 
Which brings us to the yields being paid currently for retail, many of which are not in prime retail positions. To my mind a retail store in a secondary retail location has limited options once the current tenant departs. As opposed to a multi purpose industrial building in an industrial zone in an industrial area, which could suit a very wide variety of tenants.

It simply does not make sense to me that substantial premiums are being paid for these retail outlets, with less utility, than the generalist industrial building.

But then perhaps I am missing some simple part of the equation. Any guidance would be welcomed.


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