Real Estate & Property
Several different yields are used as measures of a real estate investment, including initial, equivalent and reversionary yields.
Initial Yield is the annualised rents of a property expressed as a percentage of the property value.Initialyield.com (May 2012). "Glossary, Initial Yield". Initial Yield. http://initialyield.com/category/glossary/. Retrieved May 2012. E.g. £100,000 passing rent per annum £1,850,000 valuation 100000/1850000 = 0.054 or 5.4%
Reversionary Yield is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the ERV.Initialyield.com (May 2012). "Glossary, Reversionary Yield". Reversionary Yield. http://initialyield.com/category/glossary/. Retrieved May 2012. E.g. £150,000 ERV per annum £1,850,000 valuation 150000/1850000 = 0.081 or 8.1%
Equivalent Yield lies somewhere in between the initial yield and reversionary yield, it encapsulates the DCF of the property with rents rising (or falling) from the current annualised rent to the underlying estimated rental value (ERV) less costs that are incurred along the way. The discount rate used to calculate the net present value (NPV) of the DCF to equal zero is the equivalent yield, or the IRR.Initialyield.com (May 2012). "Glossary, Equivalent Yield". Equivalent Yield. http://initialyield.com/category/glossary/. Retrieved May 2012.
The calculation not only takes in to account all costs, but other assumptions including rent reviews and void periods. A trial and error method can be used to identify the equivalent yield of a DCF, or if using Excel, the goal seek function can be used.
Read more about this topic: Yield (finance)
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