How does the valuator inspecting your property assess the yield?
To a valuator, the yield is all about:location, structure and tenant. The best point to start is prime yields, the best in all three categories. As examples, we will take a look at the head office of Discovery in Sandton, scheduled for completion in 2017, and FNB’s Portside building in the Cape Town Central Business District (which happens to not be an investment property, but the principles are the same). Both of these new buildings are located in the densest commercial parts of their respective cities, both have or are aiming at achieving five-star ‘green’ rankings and both have occupants that have strong profitability, liquidity and balance sheets. As yeild is the inverse of rent, the lower the yield the higher the value the valuator will assign. In an ideal world, you want a quality asset and high yield, but where do you strike the balance?
Like income, yield is not solely a product of location. Most important will be the quality of the tenant. A valuator will want to examine the accounts of the tenant (or tenants) to see how financially sound they are Think of a valuator as a nicer version of your bank manager- the latter only looks to see if you can repay him, but the valuator will check if the tenant can repay you and he does this through a knowledge of accounting and business acumen, how businesses produce income and how stable that income will be over the term of the lease. The larger and older a tenant is, the easier it is to assess, a proprietary company formed last year is a difficult proposition.
The locations with the least risky yields are urban, not rural locations. Generally, the more modern a building, the less it will cost the landlord to maintain, hence a lower yield.
There are, of course, complications in larger multi-let properties. A valuator will add 1% to the yield for sub-letting properties because they are normally unattractive. This will reduce the price of the building and increase demand. The rent pattern is important because yields are higher if rent is taken in advance instead of in arrears.
Valuators are nothing if not commercial. Most good valuators must be able to exercise an independent view and their conclusions must aid the property investor and not hinder him. However, they are not fortune tellers; as they say, the impossible we do at once, miracles take a little longer.