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Looking beyond yield when evaluating property as an investment

Purchasing property as an investment involves a lot of considerations.  Whilst investing in a property with Assetz Exchange makes this process a whole lot easier, we still urge investors to look beyond the ‘headline yield’ when deciding to buy a share of a property investment. (See our blog on How to Calculate Rental Yield which also outlines how we calculate our estimated yields on the Exchange).

Looking beyond the headline yield allows property investors to balance potential returns against risks and to be able to estimate more likely scenarios for the lifetime value of the investment and opportunities for capital appreciation. Equally, overpaying for a property runs a risk that investors vote to physically sell the property before prices have appreciated further to cover that capital loss, so having an eye on the full picture of the property investment is vital.

Here’s our checklist of the most important factors to research and check out on our Exchange and beyond when making property investment decisions.

Bricks and mortar valuations

Simply put, make sure you investigate what you believe the property would sell for on the open market if it were vacant and without a lease attributed to it.  To help investors in this regard, before any property is bought, Assetz Exchange always commissions a valuation by an independent qualified chartered surveyor (typically a member of RICS).  These are valuations undertaken by a professional who will visit and inspect the property to form an opinion, typically by comparing it to comparable property sales in the area. 

A RICS valuation however is no panacea, it is simply the surveyors’ professional opinion at that moment in time.  It may be difficult to form an accurate opinion if there are limited transactions of similar properties in the area or if prices are moving fast.  At the end of the day a property is only worth what a buyer is willing to pay for it when a property is put up for sale and that can depend on many factors.  A property can sell for more or less than a RICS valuation and investors should always bear this in mind.

Length and type of lease

If a property is let at an above market rate or if it has any special characteristics – such as the tenant being responsible for repairs – then investors may place a valuation on the property in excess of the bricks and mortar valuation.  It is, however, important to consider how long remains in the lease, any break clauses contained and how likely it is that the tenant will ask to renew the lease.  Typically, the longer an above market rate lease has to run, the higher the value an investor will attribute to it.

All lease documents relating to an Assetz Exchange property can be found on the Exchange, plus the lease end date and next break clause date are always clearly specified, where appropriate.

Characteristics of leaseholder

Not all leaseholders are equal …

For example, currently on the Exchange, we can contrast the 10 properties that are on leases to the housebuilder Avant Homes who are using them as showhomes and the properties on leases with the charities Nacro, Golden Lane Housing and United Response.  Once Avant Homes have finished selling their developments they will not have any requirement for the houses and so will not look to renew the leases.  If the properties are then let on regular ASTs then the yields will fall substantially (perhaps by 50% or more) and investors may choose to physically sell the properties.  This would result in the fixed costs of purchase investors incur being lost and could potentially lead to a capital loss for those investors who have paid too high a price on the Exchange.  By contrast, Nacro, Golden Lane Housing and United Response actively look to renew their leases as they need to provide longer term housing.

New build premium

New build properties (i.e. a new construction as opposed to buying a previously owned house) often attract a premium in the market as people may happily pay up to be the first to live there and for everything to be brand new and unused.  These premiums can be up to 10% on comparable used properties. 

The 10 Avant Homes properties on the Assetz Exchange platform are all new builds and investors should take this into account when considering making a purchase.

Other factors

There are many other factors that investors may take into account when assessing an investment in property.  Some that are applicable to investments currently on Assetz Exchange are:

  • ESG factors – some investors will pay a premium for investments that are deemed to be helping a good cause (or an ESG investment) or may choose to invest for an ethical reason as opposed to just considering the return
  • Supply in a local area – if a developer has built a large number of homes in a local area then that may mop up some local demand
  • Location – are there any specific factors related to the local area?  A major employer relocating? Significant investment in local infrastructure (such as HS2, Crossrail)? What are the travel connections like?  Government investment? Unemployment rate? etc.
  • Furniture – new furniture bought as part of a purchase of a show home may have limited resale value
  • The prospect of capital growth in the area
  •  Economic prospects – the long-term outlook for house prices in the UK

In summary, when making an investment yield is always a key consideration. It is however important to consider other factors, such as those outlined above before committing to invest.

We hope investors find this post useful, we are happy to expand further or discuss its contents and can be contacted at info@assetzexchange.co.uk

Our innovative platform allows investors to buy and sell slices of supported accommodation properties commission free, and to receive monthly income and capital gains on their investment. For further information on investing in social housing with us, click here

For further information on Assetz Exchange and to register as an investor click here

Your capital is at risk and is not covered by the Financial Services Compensation Scheme (FSCS).


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