CT1 Ch11 Property Running Yield Question

[Adam Ahmed]

Hey all,

Hope everyone's revision is going well. I had a question about running yield, wondering if someone could help with my understanding.

So in chapter 11, it mentions that: "The running yield from property investments will be higher than that for ordinary shares". From the definition this would suggest:

{Rental Income (Net)/Purchase Cost (Net)} > {Dividend Income/Market Price}

However, from the reasons given in the book. It seems to suggest otherwise? The reasons given include:

"1. Dividends usually increase annually, where as rents are reviewed less often"
"2. Property is less marketable."
"3. Expense associated with property investments are much higher"
...etc.

Clarification on this would be much appreciated.

Thanks,
Waqas

 

[Dillon]

I think it is implying that because of those undersirable characteristics, property investors require a higher yield to make it worthwhile.

To put it another way, for a given rental return, the price of the property will be relatively low because investors will be put off by those characteristics.

 

[John Lee]

Absolutely. As an investor you want compensation (in the form of higher return) for these poor characteristics.