The Ultimate Guide to Real Estate Terminology: What Every Buyer and Investor Should Know

Posted by Colliers on 23rd September 2024 -

Whether you’re just starting your career in real estate, a first-time buyer, or simply curious about the market, understanding the jargon can be a real game-changer. The real estate industry has a plethora of complex terms and acronyms that can be overwhelming for beginners to interpret.

Below we decipher the language used across a range of commercial and residential property sectors with easily digestible definitions. 

Absorption rate: The absorption rate is used to evaluate the rate at which available units are sold in a specific market during a given period. It is calculated by dividing the number of units sold in the allotted period by the total number of available units.

ADR (Average Daily Rate): The average daily rate (ADR) is a metric widely used in the hospitality industry to indicate the average revenue earned for an occupied room on a given day. The average daily rate is one of the key performance indicators (KPIs) in the hotels sector.

Break clause: A break clause is an explicit right for the landlord, tenant, or both to terminate the lease at an agreed point. This can be a specified date (or dates) or can be a rolling break, which enables the relevant party to break the lease at any time during the term of the lease.

Build-to-Rent (BTR): Build-to-Rent is a type of residential development that is purpose-built as rental accommodation, as opposed to being sold to private homebuyers.

CAGR (Compound Annual Growth Rate): The compound annual growth rate is the rate of return that an investment would need to have every year to grow from its beginning balance to its ending balance, over a given time period.

Covenant (investment property): A covenant is a legally binding obligation included in the title deeds of a property, which new owners must adhere to. These obligations are usually perpetual, making it crucial for buyers to be aware of any covenants affecting the property (i.e., an existing tenant) they intend to purchase.

Exit yields: When exiting an investment, the exit yield is used to determine a suitable selling price for the property. An exit yield uses comparative data to assess the location, quality, lease length, and tenant quality of the property to provide a compelling exit price.

Freehold: Purchasing a freehold gives you outright ownership of a property, the building, and the land it is built on. This means there is no ground rent to pay.

Grade A space: Built to the highest specifications in terms of functionality, design, onsite amenities, and location. Generally, it is newly constructed and outfitted with top-of-the-line fixtures, amenities, HVAC, and technological systems, as well as meeting the latest ESG specifications.

Leasehold: The type of contract between which allows a tenant to occupy and use a commercial or residential property in exchange for scheduled payments (rent) over a set time period. The landlord will remain the owner of the property and the tenant may also be expected to pay additional costs for maintenance to shared elements of the building through ground rents.

Occupancy rate: Occupancy rate is the ratio of rented or used space to the total amount of available space.

Private Rented Sector (PRS): The private rented sector is an umbrella term used to describe any residential property in which a tenant lives and pays rent to a private landlord. The PRS model also includes buy-to-let properties, i.e., properties purchased by an individual investor in addition to their primary residence, to earn an additional income in the form of rental revenue.

Raw Material: Raw materials are the basic materials from which products are manufactured. They are often commodities that are used in the production of goods.

Retail Price Index: The Retail Price Index measures the average change from month to month in the prices of goods and services purchased by most households in the UK.

RevPAR (Revenue per Available Room): RevPAR is a metric used in the hospitality industry to measure hotel performance and attractiveness as an investment. The measurement is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate.

Vacancy rate: The vacancy rate is the percentage of all available units in a rental property that are vacant or unoccupied at a particular time.

Yield compression: Refers to the yield on an investment property decreasing due to an increase in the property’s price, while the income it generates remains relatively stable. This often happens in markets where demand for property is high, and investors are confident in the stability and growth potential of the property’s income stream.