At a recent auction, a commercial property sold for a 3% yield. (For your information, Yield is calculated as net rent divided by the purchase price. And Net Rent is the rent you get in your pocket after deducting operating expenses such as rates, insurance, body corporate fees).
But Does Comparing rental yields with term deposit interest rates, make any sense?
To compare the term deposit interest rate with commercial property yields can be quite misleading.
ON the surface, low yields on an commercial property does not mean the investment is worse than putting the money in a term deposit.
There are many other factors that affect the value someone will pay for the property besides the current rent.Just looking at the yield alone does not account for the fact that in many cases the land is more valuable than the improvements and hence commercial investors treat the rent as temporary. Likewise the land may be bought by a neighbour, and the combined value of which has nothing to do with yield.
Even if the purchaser is focused on rental income, the current yield does not take into account that the contractual rent may be increased depending on the terms of the lease. Most leases provide for regular rent reviews.
That’s why solely basing an investment decision by comparing rental yields to the term deposit interest rates does not make any sense.