5% vs 6+% Yields (FRI & AST Leases)

Photo by Micheile Henderson on Unsplash

You may have noticed since the turn of the year; Yielders have made further conscious efforts towards reducing the risk profile of our product offering – with the enhancement and strength of our convenance with deal flow partners/ Tier 1 managing agents. Previously where we may have been able to negotiate an overall yield of 6+% (in some cases 7%) with privately let AST (Assured Short-Term Tenancy) contracts – the ongoing management of these assets have caused significant issues; due to Covid-19 and the rights given by the government to occupants. We would like to address why 5% yielding assets are becoming more common.

AST Contracts

Many of our original properties were rented to private tenants on AST contracts, which also had high projected net rental yields of around 6+%. However, over time we realised that there is a greater chance of net yields being diminished with AST leases, through the risk of void periods (receiving no rent between tenancies) or unforeseen costs, such as replacing appliances or furnishings. Whilst the net rental projections can be high for such properties and leases, it is hard to mitigate against unforeseen micro and macroeconomic risks, which was especially apparent during the coronavirus pandemic. As such, the original projected net returns of 6+% are no longer achievable and in some instances have even reduced below 5%.

FRI Leases

Therefore, as our financial analysis, due diligence process, relationships, and business acumen has matured, we decided to make the transition to FRI, fixed term leases with reputable housing associations, agencies and government funded organisations. Full Repairing & Insurance (FRI) leases are arranged so that tenants are required to account for all internal property costs, including repair and insurance. The structure of the leases we now pursue also ensure payment over a fixed term, providing Yielders with greater clarity for financial and cash flow analysis, resulting in a more accurate net rental projection. Although the forecasts are usually around 5-5.5% net, we believe opting to invest in assets with FRI leases provide significantly more stable yields than privately rented AST assets and provide greater resilience against macroeconomic shocks. In comparison to other products on the market and comparing ourselves to interest baring savings accounts (currently interest rates are at 0.25%) shows that a 5+% yield is extremely competitive. Indeed, further de-risking the investment opportunities will allow investors to earn stable and accurate returns in line with our conservative projections, with a view to outperform as we have previously managed to do.

Partnerships & ESG Investing

Additionally, by working with housing agencies housing vulnerable persons, asylum seekers, disabled people, and the elderly we can provide the capital and stability they require to ensure a secure home for their tenants for a considerable number of years. Indeed, we believe this is especially important given our role as an ethical, Islamic investment platform and continues to align to our progression in the ESG investment space.

Investing with Yielders presents an opportunity to invest in a market that is not available to most people. We take the hassle out of property investment, cultivating relationships with partners to bring new opportunities to our platform every month for our investors.

As shown by the below, the material impact on investors returns from 5% to 6% is minimal in the grand scheme of the investment period. Please see the table below for an illustration of the difference in yields of a 5% vs. 6% asset over a 5-year period.


Scenario 1 (6% Yield, AST Lease)

Initial Investment: £10,000

Returns at 6% Net Yield

Rental Returns: £600 p.a.

Cumulative Rental Earnings over 5-year period: £3,000

Scenario 2 (5% Yield, FRI Lease)

Initial Investment: £10,000

Returns at 5% Net Yield

Rental Returns: £500 p.a.

Cumulative Rental Earnings over 5-year period: £2,500

Scenario 1 v Scenario 2 – An explanation

Although an investor would earn £100 per year less at a 5% yield, the returns would be far more stable and mitigate against any abnormal conditions(e.g., no tenancy void period) and more resilient to macroeconomic shocks (COVID-19 pandemic). The 6% yield may have a higher projected return; however, the risk of void periods or unexpected works can reduce the yield below 5%.

Please note that projections on capital appreciation of assets over the investment period are not impacted by the lease type – in fact, most of the leases we have agreed and organised are 7, 10 and 15 years in length so at the end of our 5-year term these will have a positive impact on the price we are able to sell for.


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