What is capital growth? Definition and meaning
Capital growth – the increase in an asset’s or investment’s value over time – is the aim of every investor. It is measured by comparing the investment’s or asset’s current value with how much it originally cost. It is also called capital appreciation.
The term is generally used when talking about real estate or financial investments.
Generally, investors who go for capital growth have a higher risk tolerance than those who seek income.
Blue chip stocks generally provide moderate growth, while more speculative investments may result in impressive high growth or disappointing contractions.
Over the long term, property provides more capital growth than most other investments.
Rental yields and capital growth
Some economists say that in the property market there is an inverse relationship between high yields and capital growth. In other words, where rents are high in relation to properties’ values, their growth is not so good. The reason being that it takes longer to sell properties where rents are high.
Real estate experts generally disagree, saying that both are possible in the same area, i.e. high yields plus capital growth. The secret they say, is knowing which geographical areas to invest in.
Growth rates and average incomes
As far as properties are concerned, the number one driver of capital growth is average income in a geographical area, rather than the size of the population.
If an area has lots of people, but their average household income is low and is not rising, capital growth will be either slow or non-existent, compared to another area where people earn more and experience faster rates of income increases.
Areas where average income is growing faster than nationally tend to have superior capital growth rates.
When you buy a property, you can take some steps to speed up capital growth. New buildings or extensions can be built on the land, or existing structures may be improved.
Income versus growth
When people are planning to invest, they first need to decide what they want – growth or income.
With financial investments, income is generated from dividends earned from shares and interest paid on deposits. Bonds and savings accounts are examples of income-producing investments that generally provide regular and safe returns.
Growth assets, such as property and shares, are more suited to those who want to invest for at least five years. These types of assets grow and usually provide moderate levels of income.
Long-term investors may find higher-risk investments that offer the possibility of greater returns more attractive. Although they may experience short-term fluctuations, after some time they tend to bring better rewards.
According to Oxford Dictionaries, capital growth is:
“An increase in the value of the assets owned by a company, person, etc.”
Video – What drives capital growth?
Ben Kingsley, a real estate expert, explains what the number one driver of capital growth is.