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Marcin Malmon


Szczerze o nieruchomościach

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All Risks Yield

Starting today, I will be presenting on the blog a catalogue of the types of yields used in the property market. Some of them are used in valuation, others mainly in investment analysis. Thus, for valuers, this should be an indispensable tool for the proper use of information on investment property sales transactions, which is not readily available in Poland. This allows valuers to obtain information on rates of return directly from the market.

It is also worth noting at the outset that the types of yields described today and in subsequent posts are not autonomous entities, functioning independently of each other. In practice, depending on how the analysis of the transaction is performed, mixed types of rates may arise. For example, depending on whether or not transaction costs are taken into account, the initial yield may appear as net initial yield or gross initial yield

All Risks Yield

The most basic type of property yield is the All Risks Yield. It can even be called the “queen of all yields”. It is precisely this type of rate, which on the grounds of the Polish real estate market is often simply referred to as the “capitalisation rate”, which is the rate used by real estate appraisers to estimate the value of real estate using the direct capitalisation technique. It is a rate which reflects all risks as well as all… opportunities associated with investing in a given property. Like all yields it represents the quotient of the income and the price of the property. However, it is important that it is an income that corresponds to the current market level and the rate itself is derived from the market by analysing transactions of recently let properties at an agreed income that corresponds to the market level.

Practice shows that the use of this rate in property valuations sometimes meets resistance from banks or other valuation recipients. Usually in such cases, arguments are made about the allegedly purely theoretical nature of this rate. It is also suggested that it is a kind of bottomless bag into which one can throw anything and still postulate that a given risk has been taken into account in the valuation, because after all we are using an All Risks Yield.

However, in the realities of the Polish real estate market, the All Risks Yield is extremely “useful” and, contrary to appearances, should not be attributed to the aforementioned malaise. This is paradoxically due to the low availability of data on the course of investment transactions in the Polish real estate market, which significantly narrows the scope of analyses that can be made by market participants.

It is worth realising that an investor, when buying a property, considers all the circumstances surrounding it, including all the foreseeable risks and all the opportunities that are associated with such an investment. Therefore, if he has decided to pay a certain amount (price) which, in relation to the annual income from the property, creates a certain rate, this is the rate of all risks. This is the resultant of the perception of all risks and opportunities made by the parties to the sale transaction under review.

It should also be emphasised that, contrary to what the name of this rate might suggest, it reflects not only all the risks associated with an investment in a particular property, but also all the opportunities associated with it. The level of the rate is therefore the result of market participants’ perceptions regarding predictions as to future increases or decreases in the level of income derived from the property.

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