What actually creates rental yield?

Rental yield is a ratio. In the plain version, a year’s rent is divided by the price paid for the property. That ratio is useful only if both sides are the right numbers. The numbers in marketing are often the wrong ones. This note sets out what has to be true for the ratio to describe a holding. It does not publish a yield for any city.

The numerator is the rent actually received under a tenancy

Rent exists because someone needs the space and can pay for it. The usual sources are a job, a university, a hospital, or a household that already lives in the city. A visitor week can fill a short-stay calendar. It is a different contract, often under different rules, and it leaves empty weeks that a twelve-month lease does not. On the record, national statistical offices and the OECD collect housing and rent information because access to housing is a policy question. Those series are not a landlord’s bank statement.

A reading: where the occupier is a payroll, the rent moves with employment, credit and the supply of competing homes. Where the occupier is a guest, the rent moves with flights and the season. Treating the second as if it were the first is how a gross figure is built on nights that will not happen.

The denominator is a price with a definition

The Bank for International Settlements publishes residential property price indicators for a large set of countries, in nominal and real terms. Its own note on the series is the caution: national indicators differ in the type of property, the area covered, and whether new and existing homes are both included. Two index levels are not two prices. A yield that uses an asking price, a launch discount, or last year’s index has not yet used a transaction.

What sits between gross and what is kept

• Weeks with no paying occupier, including the time a tenancy takes to re-let.
• Management, cleaning, furnishing and the repairs a building actually needs.
• Service charges, sinking funds and insurance, which continue when the unit is empty.
• Tax on the rent and on the purchase, which is national and often different for a non-resident.
• The financing cost, if the holding is borrowed. That cost is a rate, not a feature of the neighbourhood.

Gross rent divided by price ignores that list. Net of some costs and still before tax is a second, quieter exaggeration. The figure that matches the owner’s experience is what is left after the list, in the currency the owner spends. None of those steps is optional. A city can have strong occupier demand and still produce a poor result once service charges and tax are in the file.