Looking Behind Your Passing Yield

Posted on 13. Nov, 2007 by in Industrial Sector, Offices, Property Yields, Retail Sector

For what reasons would you accept a Lesser Yield?

Perhaps you intend to occupy the property when the lease expires; or it may adjoin the one you already own. Either way, the initial low rental is really of little importance.

However, not every such sale will have a special value to the purchaser. More often, the reason for accepting an initial low yield will be that ...

  • There is a pending review, to bring the rental in line with market level;
  • You have a strong tenant and a long lease, and place some added value on having a secure cash flow; or
  • The property has redevelopment potential, and a short-term lease.

When can you snare a Higher Yield?

Sometimes the lease on a property is short, with no certainty the tenant will continue on. Therefore, despite the rental being appropriate ... your passing yield may well end up higher than usual, by way of compensation for the lack of security in cash flow.

Some of the other reasons for you obtaining a higher passing yield could be that ...

  • The rental is above market, and likely to fall when the lease expires;
  • The property is purpose-built, and only suitable to a narrow range of alternate uses;
  • The building itself is obsolete, and would soon in need of upgrading or replacement;
  • The tenant could be considered financially weak; or
  • The property may be occupied under a non-conforming-use permit.

So, what should you make of all this?

Basically ... you must not simply accept every passing yield as "reflecting the Market", when you're looking for comparable sales.

Instead, make sure you look behind each sale. And you need to discover whether ... the rental was at market level; the tenant and lease period were secure; and if there was any potential for development.