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Capital Appreciation

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Capital Appreciation

Capital appreciation or capital growth is one of the most important if not the most important sources of return for property investments. Capital growth is the change in the market price of a property.

So if a property is bought for £100,000 and is sold for £150,000 the capital appreciation is £50,000 or 50%. If we want to estimate capital growth for an interim period before a property is resold then the property needs to be appraised in order to estimate its market value and compare it with the purchase price. So, if the purchase price of the property is £100,000 and after a year is valued at £120,000 then capital appreciation over the particular holding period is £20,000 or 20%.

Capital growth is one of the two components that make up the total return from a property investment. The second component is the income return, which is based on the net operating income that a property produces. Given that the typical income return for property investments ranges from 5-10% depending on property type capital growth is necessary for achieving double-digit returns from property investments. Of course, in order to calculate the return attributable to capital growth we need to deduct any sales and other costs as well as any taxes payable on capital gains.

Within this context, investors pursuing double-digit returns it is important to focus on markets and properties that have the best prospects for property value increases. For this reason it is important to understand the circumstances, factors and market conditions that trigger strong property value increases.

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