We discuss the concept of rental yield, what it means, and how it can aid in making decisions in real estate investing.
Investing in real estate can often seem like a safe option for interested parties. People will always need a place to live or work, and providing that for a fee seems like a sure bet to continual income. However, some locations and properties will be better to invest in than others, and one way to figure out where to invest is by looking at rental yield.
Rental yield evaluates the return generated by a property against its value or the overall cost of the investment. It is a quick tool that can identify properties or locations with high investment potential.
Types of rental yield
There are two types of rental yield: gross yield and net yield. Both calculations differ in terms of perspective; what is the property income being measured against? Gross yield measures rental income against the market value of a property or overall investment made in the property, while net yield factors the ongoing costs of the property into the calculation, subtracting it from the rental income.
Assuming Steve purchases a home in Lagos for ₦25,000,000 and rents it out for ₦1,250,000 per annum, the gross rental yield equates to his annual rental income minus the value of the home multiplied by 100. Thus, his yield will be (1,250,000 / 25,000,000) x 100 = 5%.
Net rental yield is a little more complicated; it factors in the ongoing costs of a property, such as council taxes or mortgage payments. Assuming Steve purchased the home for ₦5,000,000 on a 15 percent mortgage rate and charges ₦900,000 annually, his rental yield is calculated thus: [(900,000 – 750,000) / 5,000,000] x 100 = 3%.
Leading cities in Africa for rental yield
In a market that is low on speculation, the value of a property can simply be the cost used to acquire or construct it. Simpler valuations like this mean that it is more meaningful to calculate gross rental yield, as the cost-of-living database, Numbeo, has done in Africa.
According to Numbeo, the leading city for gross rental yield on the continent is South Africa’s administrative capital, Pretoria, with an average yield of 17.1%. The city hosts all foreign embassies in the country, and also the seat of the executive government.
It is also a noted academic and research centre, housing three major universities – Tshwane University of Technology (TUT), the University of Pretoria (UP), the University of South Africa (UNISA) – along with research centres such as the Council for Scientific and Industrial Research (CSIR), and the Human Sciences Research Council, and the National Research Foundation.
South Africa is, by some distance, the most represented country on the top cities list. The country boasts four of the five leading cities – Pretoria, Port Elizabeth, Durban, and Johannesburg – with Cape Town also placing in the top ten.
The country boasts Africa’s most technologically advanced, diversified, and industrialized economy, as well as most of the continent’s best universities. There is a sizeable middle class, which is yet growing, and a demand for skilled labour. All these contribute to a demand for rental property and an attractive rental yield for investors.
Common themes on the list are the presence of administrative capitals (Ethiopia’s Addis Ababa, South Africa’s Pretoria, Egypt’s Cairo, Kenya’s Nairobi); main economic centres (Cameroon’s Douala and South Africa’s Johannesburg); tourist destinations (Morocco’s Marrakesh, South Africa’s Gqeberha, formerly Port Elizabeth). Coastal cities which have grown around major seaports and are now tourist (Durban) or business and technology (Cape Town) hubs are another theme.
The importance of rental yields
Rental yield is important to investors when it comes to choosing where to purchase or invest in real estate. An investor will look at rental yield to understand how different properties will perform, or whether to even invest in real estate as opposed to financial instruments like stocks and bonds.
It can also help determine how to invest in property – to purchase outright or via mortgage – when one factors in net rental yield. For an investor, understanding rental yield could be the difference between a staid investment and achieving major profits and returns,