There are types of property which are run on the commercial model (such as student accommodation) which ARE worked out on a net yield because they can incur some additional running expenses. Let’s look at how the commercial property model works, using student accommodation as an example. Currently, BMB Real Estate is offering a bespoke, off-plan student development to our investors. Being off-plan and therefore considered a ‘higher risk’ than an already-performing property asset, the yield is high and the purchase price is low.
Off-plan purchase price: £85,000
Gross rental income: £9,435 (an 11.1% gross yield)
Net rental income (after management fee and sinking fund): £7,685 (a 9% net yield)
We can see how this investment brings in a good, passive income from your performing property asset, but what are your exit strategies and how do you add value through capital growth?
This is the clever part!
Let’s say the development is up and running as a performing property asset, rather than being off-plan as you bought it. The risk is now lower, so your secondary market (presumably another investor who wishes to purchase the unit)will not expect a 9% net yield as you did when purchasing off-plan. Rather, the desirable net yield for a secondary market will be a healthy 6% – 6.5%, but as the rental income stays the same, this means the value gets pushed up!
So, the net rental income is still £7,685. In order to get the new value, we divide this by the 6.5% = £118,230. Your commercial property has increased in value by £33,230 (39%) just on the secondary market resale. Additionally, because this is a commercial investment with funds from each room ‘pooled’ and then divided between all investors, you don’t even need to worry about your individual room being let!
For commercial property, you might argue about the yield that is being used for the calculation, but it’s a starting point. For most investment property the yields are widely agreed. As you might expect there are some regional variations and other variations based on size, age, condition and so on. If you perform your own due diligence you will note there are benchmark expectations of commercial performance.
But the bottom line is that commercial property is valued on the basis of a realistic future income stream, whereas residential property is valued on the basis of what the marketplace will pay. A very different approach!
It’s precisely this model which is on offer at our London Student Accommodation in Greenwich and which underlines the attractiveness of it.