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“In invest terminology a
falling yield is indicative of capital appreciation” - let me attempt that
in plain English. As the value of an investment increases, the income
expressed as a percentage of the investment reduces.
I think the easiest is to use an example to illustrate.
Investor A buys a flat for
R 500,000 and lets the flat out for R5000 per
month, his income yield is 12% (R60,000/R500,0000).
Three months later, A sells the flat to B for R800 000, who continues to let
the flat for the R5000 per month. B’s income yield has reduced to 7,5% (R60,000/R800,000).
Income yields, dividend
yields, interest yields and rental yields. The ratio not only provides the
investor with an indication of the income he/she will earn, but is also a
valuation tool. Assuming a constant income, an increase in yields implies a
reduction in the underlying investment value and a falling yield indicates
an increase in value.
I received a free glossy
magazine called The Property Magazine, which carried an interesting article
on the returns generated on a block of flats, which has been sold five times
in the past three years. The initial purchaser bought the block of flats
for R8 million and received a rental yield of 18%. A year later the flats
were sold for R12,25 million and earned 10% yield. The flats are currently
being sold under a sectional title development scheme worth 30 million
effectively producing an income yield of 7%.
Any astute investor will
interpret the falling yields as a peak in the property cycle, in order for
yields to return to a long-term average of 12.5%. Either the rentals will
have to rise or the value of the property will have to fall.
The likelihood of rentals
escalating dramatically given the current over-supply of rental
accommodation is low, which can only point in the direction of a price
correction. Property prices will either need to stay flat, allowing rentals
to play catch-up (as rentals increase so the yield will climb), or worst
case scenario property prices will fall and bring
yields back to their long term averages. Another article in the same
magazine carries the heading “Rust, … bust”, which implies a stagnant
property market rather than a crashing market driven by a “strengthening
buyer resistance to high prices.
My advice to anyone
currently considering a property investment to proceed with caution, the
easy money has already been made.
Mark Williams (MComm. CF)
is an independent financial advisor who can assist (District Mail)
readers with their financial queries. He can be phoned on
851-3746 of 0829605926 or e-mailed at mark@synfin.co.za.
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