"Investors don’t have to reject high yield options entirely. A high yielding asset is technically riskier than a lower yielding asset – all other things being equal – but, as Warren Buffet says, risk comes from not knowing what you're doing"
- Robert Sadler - Excellion Capital
Excellion Capital has analysed average the rental yields across 13 property sectors to highlight which corners of the market are currently bringing the highest and lowest yields, and which have seen the most drastic changes over recent years.
Lowest yields – 5% and below
For property investors who are looking for the most secure investments and access to the cheapest financing rates, low-yield assets are a prime target, demonstrating high asset values and relatively predictable rates of income. These are typically residential in nature and this also supports lower lending margins as banks need to hold less regulatory income on the balance sheet when making these loans which means they can achieve a higher return on equity even when quoting lower margins where residential in nature.
Student accommodation (4.3%)
Today, student accommodation provides the lowest yields, with the overall sector delivering an average yield of 4.3%. This marks an annual reduction of -0.25%. Yields are lower still for the Prime London Student Accommodation market, sitting at an average of 4%, while the Prime Regional market gives 4.25%.
Build-to-rent (4.5%)
The UK’s Build-to-rent (BTR) sector also delivers very stable yields, averaging 4.5% which is the same as it was this time last year. BTR yields are lower still in the Greater London Prime market, sitting at an average of 4.25%, while yields for Regional Single Family BTR and Tier 1 Regional City BTR assets both deliver an average of 4.5%. Meanwhile, Tier 2 Regional City BTR yields average 4.75%.
Other low-yield sub-sectors
While the Co-Living sector as a whole delivers average yields of 6.32%, the Prime London Co-Living market specifically gives incredible steady yields of 4.25%. And while the UK’s Warehouse & Industrial sector delivers an average yield of 5.28% (marking an annual decline of -0.22%), the Greater London estates sub-sector gives an average of 4.75%.
Finally, the London PRS sector gives an average yield of 4.76%, followed by Data Centres (5%) and Prime Regional Co-Living (5%).
Highest yields of 8%+
While low yields typically indicate a good, secure investment, some investors can see great success in taking on a certain amount of risk and snapping up high yield assets at what is usually a relatively cheap capital value per sq. ft.
One of the benefits of higher yielding assets is the large amount of income that can be used to pay higher debt costs, and provides greater optionality for lenders to be creative and de risk the loan with amortisation due to the cashflow.
Shopping centres (9.13%)
Excellion’s Investor Yields Index shows that the Shopping Centre sector currently delivers the highest yields at an average of 9.13%. This marks an annual decline of -0.44%.
Some sub-sectors of the Shopping Centre market generate even higher yields, with Local and Neighbourhood Shopping Centres both delivering averages of 10%. For Local Shopping Centres, this marks an annual decrease of -0.5%. Sub-Regional Shopping Centres give an average yield of 9%, which also marks a drop of -0.5% over the past 12 months.
Leisure (8.5%)
The UK Leisure sector as a whole currently gives an average yield of 8.5%, but Good Secondary Leisure Parks average higher at 9%, while Prime Leisure Parks bring an average of 8%.
High Street Retail (7.8%)
While the average yield for High Street Retail sits at 7.83%, marking an annual decline of-0.25%, Good Secondary High Street Retail specifically delivers a heady average of 10%.
Within the shopping centre sector, local and neighbourhood shopping centres are performing particularly well, both delivering average yields of 10%, while sub-regional shopping centres return 9% and regional shopping centres deliver an average of 7.5%.
The Co-Living pendulum
While the Prime London Co-Living sub-sector, as mentioned above, currently generates one of the lowest average yields (4.25%), the wider HMO sector of England & Wales brings one of the highest average yields of 9.7%.
“For property investors, yields must be considered with real nuance," explained Vice President of Real Estate at ExcellionCapital, Robert Sadler. "Low-yield assets are often considered as the most lender-friendly because they indicate a high asset value, steady and reliable income and, therefore, relatively low risk, however the lower the yield the lower the quantum of debt that can be supported by the asset,"
He added, "Lenders are most concerned with the long-term value of an asset rather than the income it generates, they’re going to be far more willing to lend at attractive rates - albeit lower leverage - for low-yield assets and be incredibly wary of the more unpredictable, erratic high-yield concerns of the market. It’s certainly a quirk of the real estate investment market that higher income relative to asset value is not always seen as a good thing.
"That being said, investors don’t have to reject high yield options entirely. A high yielding asset is technically riskier than a lower yielding asset – all other things being equal – but, as Warren Buffet says, risk comes from not knowing what you're doing,"
Sadler continued, "We work with many highly astute investors who are experts at selecting high yield real estate with potential for significant value enhancement and yield compression.
"The advantage of a high yield asset, such as a shopping centre, is that there is usually significant income relative to the loan amount, meaning that there is plenty of surplus income to both service the loan and help fund business plan objectives, such as capex, tenant incentives and ongoing property management.
He concluded, "Finance for these assets can be tricky but it is obtainable for well located properties managed by competent investors.”
