Property Perspectives: Income Yield Valuation

There are countless approaches to decide on a final purchase price of a property.

Some include – merely quoting a 5% discount from the listed price; taking a median of the district’s previous transactions; nice sounding number eg. S$1,888 psf.

Of course intangibles play a huge role in a property’s valuation. Factors such as location, general feel, facing, etc. But nevertheless, Mr Greenshoe takes a slightly more theoretical approach to quoting a price.

Similar to valuing a company, theoretical approaches towards a purchase price decision include:

• Discounted Cash-Flow (present value of all the future potential cashflows attributed to the property + terminal value which is the potential selling price after X number of years)
• Transaction Comparables (previous relevant transactions that took place in the same area)
• Base Value (cost of the site + building construction cost)   
• Income Yield Method (read on friends)

The income yield method is typically used as a way to achieve a rental yield – this is for investment properties. For non-investment properties, an implied rent can be derived from one’s opportunity cost of staying at the respective apartment.

To utilise the income yield method, one must first derive a rent –  for a resale, it would be listed / precedent rents in the same development; for a newbuild, it would be comparable rents around the area.

Income yield is then obtained by: (Derived Rent * 12 mths) / (Value of property).  

Squarefoot Research www.squarefoot.com.sg has published an entire page on the top yielding properties in Singapore. Attached here for your convenience.  Don’t be too shocked by these kinds of yields. The Singapore average is roughly 2.5 – 3.5%. Some of these yields are from shoebox apartments such as Suites @ EastCoast which has areas as small as 377sqft hence the relatively higher yields.

Building upon this income yield method, one can also value a property based on a target yield. Let’s use an example:

Assume an investor is confident in receiving 3.5% from fixed deposits / stocks / alternative investments. He would hence expect a yield of >3.5% from real estate. Let's use an example: 

• A 1 bedroom apartment currently sells at S$1m dollars. Rental is S$2900 a month, resulting in a yield of 3.48%.
• Should a yield demanded be >3.5%, say 3.6% for illustrative purpose, one would take (S$2900 x 12) / 0.036, equating  to S$966,667 which should be the maximum price one is willing to offer
• Building upon this further, one can then subtract maintenance cost from the rent and then calculate an implied value. Example, [ (S$2900 – S$250) x 12 ] / 0.036 = S$883,333.

Voila, this method is one of the several handy pocket calculations one can utilize before deciding on a purchase price.

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GS