A valuation metric that represents the number of years’ worth of income an asset is expected to generate, converting annual income into capital value. It helps in determining the market value of the property by analysing its income potential.
How is Years’ Purchase calculated?
For a simple investment producing a constant annual income, Years’ Purchase can be calculated using:
Years’ Purchase = 1 ÷ yield
The yield must be expressed as a decimal. A yield of 5% is therefore entered as 0.05:
1 ÷ 0.05 = 20 Years’ Purchase
The estimated capital value can then be calculated using:
Capital value = annual net income × Years’ Purchase
RICS expresses the same relationship as capital value being annual income divided by the yield.
Valuation example
A property produces a net rental income of £20,000 per year and comparable investments indicate a yield of 5%.
- Years’ Purchase: 1 ÷ 0.05 = 20
- Capital value: £20,000 × 20
- Estimated capital value: £400,000
This is a simplified investment valuation. A professional valuation may also account for lease length, rent reviews, operating costs, future income changes and the risks attached to receiving that income.
How does the yield affect the valuation?
The yield and Years’ Purchase move in opposite directions:
| Yield | Years’ Purchase | Value of £20,000 annual income |
|---|---|---|
| 4% | 25.00 | £500,000 |
| 5% | 20.00 | £400,000 |
| 6% | 16.67 | Approximately £333,400 |
A lower yield produces a higher Years’ Purchase and therefore a higher valuation. A higher yield produces a lower multiplier and valuation.
This happens because a higher yield will generally reflect a greater perceived risk, weaker demand or less certainty about the income. The appropriate yield should come from comparable market evidence rather than being chosen simply to reach a preferred value.
