Yields on Philippine real estate are considered high compared to other countries. In addition, the rent of Philippine real estate is increasing every year, and if the property acquisition price can be kept down, properties with a yield of 10% are common. This article explains the key points to realize high yields as well as the basics of Philippine real estate yields.
What is Yield in Philippine Real Estate?
Difference between gross and net yields
What is the yield on Philippine real estate?
Yield is the expected annual return on a real estate investment. There are two main types of yields in real estate investment: surface yield and real yield.
|Surface Yield(Gross Yield)||Rate of return calculated based on annual rental income relative to property value|
|Real Yield(Net Yield)||Annual rental income minus annual expenses as a rate of return|
Surface yield is the yield of rental income earned in one year on the property price.
When actually starting an overseas real estate investment, there are expenses other than property acquisition costs, such as registration fees at the time of property acquisition and furniture purchase costs, which are not taken into account in the surface yield. The real yield is the yield after taking into account the actual expenses for purchasing furniture, taxes, and annual maintenance costs.
In Philippine real estate, surface yield is often referred to as gross yield or gross yield (overall yield), while real yield is referred to as net yield or net yield (real yield).
How to Calculate Yields on Philippine Real Estate
The surface yield can be obtained by dividing the annual income by the purchase price x 100.
The real yield can also be obtained by dividing (annual rental income – annual necessary expenses) by the property price x 100.
Average Yield Rate of Philippine Real Estate
Philippine real estate has the second highest yields in Asia
Yields on Philippine real estate are among the highest in Asia
According to a report by GlobalPropertyGuide, the average rental yield for properties in Metro Manila is 6.13%, the second highest yield in Asia. The average rental yield in Tokyo is 2.66%, making Philippine real estate more than double the yield of domestic real estate.
The 6.1% yield is only an average yield, and yields are usually higher than average for yield-focused investment properties. In addition, many high value-added properties have achieved yields of 10%.
Average yields on Philippine real estate are increasing every year
A major characteristic of Philippine real estate is the possibility of rent increases even with the passage of time.
Compared to domestic real estate, Philippine real estate is considered a “lender’s market” because demand is greater than supply and there are no laws in place to protect tenants as there are in Japan. Therefore, it is not unusual for renters to find that the rent increases each time they renew their lease, even though they are living in the same property.
What are the ideal yields and minimums for Philippine real estate investment?
What is the ideal and minimum yield for Philippine real estate investment? aThe ideal yield for Philippine real estate is 8% or more, which is sufficient by differentiating the property by furnishing and identifying the property. On the other hand, the minimum surface yield you want to secure should be at least 5%, due to expenses such as management fees to real estate companies, management fees to condominiums, and property taxes.
Properties in Philippine real estate that are difficult to earn income gains
While it is said that it is easy to find tenants quickly if the right property is settled on at the right price, there are several properties in Philippine real estate that are difficult to find tenants (i.e., properties that are difficult to earn income gains).
In the case of extremely high-end properties with extremely high rent, such as 3 bedrooms or more: 150,000 pesos or more per month, tenants with the financial ability to pay the rent are limited. In addition, those who can afford to pay that much rent have the option of “buying the property themselves,” making it difficult to find tenants.
Properties with their own rules regarding rentals: Some hotel-affiliated properties have their own rules regarding rentals, such as “you must bring in the designated furniture and use the designated management company when renting out the property. If such rules are in place, it may be difficult to flexibly change the terms of the contract or lower the rent if no tenants are found.
The rental price is significantly higher than the market price: If there is no differentiating factor between the property and other properties with similar conditions, but the rent is extremely high, it may be difficult to find tenants,
Contract term of more than 1.5 years: Investment properties in the Philippines are the highest grade of real estate preferred by the Japanese, and it is not uncommon for the majority of tenants to be foreigners. For expatriates who do not know when they will receive their next assignment or for foreigners who are on a trial migration, it is often the case that they want to keep the contract period as short as possible and re-sign if they are satisfied.
Conversely, if the tenant is leasing the property en bloc as company housing, etc., the tenant may request an extension of the contract period. This is because rent prices in the Philippines are rising year by year, and by signing a contract ahead of time, tenants can reduce the risk of rent revisions.
Profits can be made even with low yields in Philippine real estate
Even if a property is purchased at a premium to the purchase price and the yield appears low at first glance, it is still possible to secure the final balance after the sale. In the Philippine real estate sales market, real estate prices have been rising steadily except during pandemics.
Unlike domestic real estate where the market price is stable to some extent, “one-time yields” may not be that helpful for newer properties or those with a premium, as there is a good possibility that rent will rise in the future.
Rather than a one-time yield, it is more important to determine the true value of the property and make an investment decision with an eye on the final residual amount of capital gains and income gains after the sale.