Convergence of Yield : A Study of How Yield on Rental Residential Properties Coincides at Similar Levels Regardless of Location in Sweden

University essay from KTH/Fastigheter och byggande

Abstract: The interest for real estate investments has risen during the last years and this applies inparticular to investments within the residential segment. In excess of the active interest inhousing, there is a distinct trend that newly produced residential properties are extra interestingamong investors. However, the pricing for these types of investments has been shown to bedifficult to estimate due to, among other things, few comparable objects in the surroundingarea. As interest soars in newly produced residential properties, the price has also risen sharplyputting downward pressure on the yields. The sharp increase is a result of the large demandthat can be seen in all locations in Sweden, especially places that have not previously been asobjectively attractive. Smaller municipalities that previously had a relatively high yield nowhave a much lower yield than a decade ago and there is an explicit trend that yields have startedto converge regardless of location in Sweden. This study aims to investigate how the yield on newly produced residential properties hasdeveloped in different locations in Sweden and to analyse why yields have started to convergein places that are characterized by completely different attributes.The result of this study is that yields have converge and the differences in yield spread inSweden have decreased with up to 62.5 % between 2006 to 2020. When estimating the yield level, several risk factors are taken into account. One of these is therisk assessment of the location factor. The risk for vacancy in a smaller town is greater than ina larger, more attractive town, which is why the yield should differ markedly between theseplaces. However, investors still do not seem to take the location factor into account which isdue to several things. Among the causes this thesis has found as fundamental reasons for theyields to converge are investors' changed view of investment in the residential segment ingrowing areas, an increased demand for the segment due to the prevailing housing shortage,increase in number of international investors and the favorable market conditions.Furthermore, Sweden's legislation regarding rents has a positive impact on the demand forresidential properties as this investment is considered a safe investment with stable cash flows.

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