How should Investors value residential property in today's market ?

I recently read an article, by a prominent UK property commentator, in which he explained his belief that the way in which professional investors value property has changed forever since the credit crunch. He argued that there is a tendency towards a more commercial property style of valuation i.e. valuing properties solely in terms of rental yield, rather than taking in to account recent sale prices of comparable properties and other factors such as the quality of the surrounding area etc. The writer stated that ‘market value’ was now a subjective concept that was no longer relevant given the greatly reduced number of property transactions taking place since the credit crunch. I do think there is some merit in his argument but I also think it would be foolish to adopt this strategy as your sole method of residential property valuation. We have always been advocates of investments that generate a good rental yield and always will be. We only ever invest in properties that deliver us a good income after all costs and never buy a property that doesn’t deliver an income, in the hope that we’ll experience strong capital growth to compensate for this. So I agree that looking for as good yield makes perfect sense, especially when the short to medium term prospects for capital growth are uncertain. However, I don’t agree that rental yield is the only factor that should be used to value a property. We must remember that, as residential investors, we share our market place with another set of people who have very different priorities – the home owner. Whilst the private rented sector has grown significantly in the past decade, there remains a large majority of owner occupiers who buy houses because they want to live in them, not because of the rental yield. To ignore their behaviour is, in my opinion, unwise. If a family home becomes available in an area popular with homeowners, where several identical properties have recently been sold for around £100,000, I would not simply reject the opportunity to buy this property for £75,000 on the basis that my desire to achieve a yield of 8.5% would only allow me to place a value on the property of £70,000. In this case I would be comfortable in deeming the true value of the property to be correct at £100,000 because a large number of homeowners had recently purchased identical properties at this price. Why? Because homeowners who were willing to pay £100,000 for the property, and make up the majority of residents in that area, are much more likely than an investor to be the people who I sell the property to when I decide to exit. In this case I would be happy to buy the property at a 25% discount to the price a homeowner was willing to pay in the knowledge that I could easily sell the property on to another homeowner when required. The situation would be different if the property in question was a HMO (house in multiple occupation ). In this situatio I would definitely apply strict yield criteria to my valuation and subsequent purchase price. This is because my most realistic exit from that property would be to sell to another investor. However, I would also argue that this type of property is really a true commercial investment as opposed to a residential one. Of course, high yielding properties have become easier to find since the credit crunch as prices have fallen back whilst rents have increased at the same time. I do believe however that this a cyclical phenomenon rather than something that has changed forever due to the credit crunch. Many older investors will remember that 10 to 15% yields were common in the early 1990s before the last property boom. It was only when price rises far outstripped rent rises that yields declined to the levels we saw at the height of the boom. The increasing rental yields we are seeing now make this a great time to buy. Purchasers will enjoy yields that simply weren’t achievable in 2007, safe in the knowledge that capital growth will come in the future. You can see a sample of the type of investment opportunities currently available here