Question

The value of a property is €1 million and its first year Gross Potential Income is €100000 growing at a 3% yearly rate. According to Gross Yield valuation what is the discount rate for the property?

Answer 1

Gross yield : It is the income received on any investment (property) before the expenses are deducted.

Formula to calculate Gross Yield:

Gross yield (y) = Income from rent (Gross potential income) / Market value of the property

From above question, we have

Gross potential income = €100,000

Market value of the property = €1,000,000

Growth rate in rent (potential income) = 3%

therefore, Gross yield (y) = €100,000 / €1,000,000 = 0.1 or 10%

Now, Discount rate for the property can be calculated by using below mentioned formula:

Gross Yield (y) = r - g

where, r = discount rate &

g = growth rate in the Gross potential income = 3%

therefore, discount rate (r) = gross yield(y) + growth rate(g)

so, discount rate (r) = 10% + 3% = 13%

Hence, the discount rate for the property is 13%