Yield Compression

Rental yield (or simply known as “yield”) is a common indicator to gauge performance or returns of your investment. In laymen term, yield is percentage of rental return (in one year) from your property if you buy it with cash. For example, if you buy a low cost apartment for RM120k and total rental for a year is RM12k (i.e. rental of RM1k/month). Then yield (or more appropriately known as “gross yield”) for this investment is 10% per annum. This also means, if you have RM120k cash in your bank account that probably giving you up to 3% interest per annum. It’s more advisable for you to buy an apartment because that investment will give you “extra” 7% per annum. Besides, rental yield that one’s may enjoy in yearly basis, there are also potential upside from capital appreciation of your property.

For “net yield” calculation, you may deduct expenses such as building management fee, fire insurance, assessment (cukai pintu), quit rent (cukai tanah) and etc from your annual rental. For example, if all your expenses add up to be RM2k; then, net yield of your property is (RM12k – RM2k)/RM120k = 8.3% per annum. Bear in mind that all the above calculation is based on assumption that you buy the property with cash.

Based on Klang Valley housing property monitor (1Q 2012) published in City & Country recently @ 14 May 2012, we can see a drastic drop in gross yield. This phenomenal is also known as “yield compression”. Yield compression happen when rental increases at a slower rate compared to rate of property price increment; or worst if the rental remains the same but property price increase over the years. The table above shows gross yield for terrace houses has been reduced from 3.2 - 5.4% in Q1 2008 to 2.5 - 3.8% in Q1 2012. On the other hand, gross yield for high rises residential has been reducing from 5.2 – 8.3% in Q1 2008 to 4.3 – 6.6% in Q1 2012.

However, I want to highlight that although the average gross yield has been declining for properties under limelight (those being monitored by property consultancy firm), it’s still possible for one’s to get a property that giving yield at high side. Just 1 month back, I have a friend that bought a shoplot at 7.2% yield and my sister bought an apartment at 7.5% yield! For me, yield is just part of the story because tenant (rental) may come and go; more importantly is the property long term potential.

What’s the yield of property you acquired or acquiring recently?