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Get Discount on Property Applying Equated Yield Formula

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Get Discount on Property Applying Equated Yield Formula

The equated yield is the discount rate or internal rate of return which when applied to the income expected over the life of the investment produces a present value that is equal to the capital outlay. 

In this sense the equated yield is the overall internal rate of return required by investors for investing in a particular property. It should be noted though that this metric is by definition associated with assumptions of growth in rental income over the period of the investment in contrast to the equivalent yield, which reflects achievable returns assuming no change in market rents from their estimated levels at the time of analysis. Within this context, a conservative investor may prefer to evaluate an investment on the basis of the achievable equivalent yield as opposed to the achievable equated yield.

Let us consider an investor that requires an x% return assuming no growth in rents and a less conservative investor that requires a z% return but is willing to accept some moderate rent growth assumptions in the calculation of future net rental income. In the case of the first investor, since the net rental income flows will not incorporate any growth assumptions the required return will reflect an equivalent yield while in the case of the second investor who is willing to accept some future rent growth in the calculation of the investment value of the property the required return reflects an equated yield.

If the overall return required by investors incorporate some assumptions with respect to property income growth, then it should be different, and it usually is, than the initial yield or all-risks yield, which is calculated as the ratio of the property net operating income in the first year over its value or market price.

According to Brown and Matysiak (2000), the formula for estimating the value of a rack-rented freehold with a current rent Rt, estimated annual rent growth rate g, rent review every n years and market required rate of return (equated yield) of i is the following:

V = [Rt/i] [ (1+i)n -1/((1+i)n - (1+g) n) ]

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