Equivalent Yield Simulator
Drag the contractual-income bars, any market-income bar, the upper lease-expiry boundary handle and the transaction-price slider. Changing the transaction price does not alter the cash flow.
Equivalent Yield — definition
Equivalent yield is a single, averaged and weighted rate of return used in the income approach in growth-implicit income capitalisation models, particularly in the term and reversion method and in the corresponding implicit cash flow projections. The same yield is applied both to the income received during the period of the existing leases (term) and to the market income adopted for the reversion following their expiry.
It may be interpreted as a weighted average of the initial yield and the reversionary yield, reflecting both the amount and the timing of the individual income streams. The term “weighted average” does not, however, mean a simple arithmetic average of the two yields.
Equivalent yield is a single rate used both to discount the income arising in the individual years of the analysis period and to capitalise the annual market income in order to determine the residual value. From a mathematical perspective, it corresponds to the internal rate of return (IRR) of the analysed income profile: it is the rate at which the sum of the present values of the property income and the discounted residual value equals the property’s acquisition price.
The level of the equivalent yield and its position between the initial yield and the reversionary yield are influenced, in particular, by:
- the level of contractual income in the individual years,
- the length of the contractual term and, consequently, the timing of the reversion,
- the level of market income adopted for the reversion,
- the transaction price of the property.