Capital growth – definition and meaning
Capital growth is the increase in an asset’s or investment’s value over time. It is the aim of every investor. We measure it by comparing the asset’s current value with how much it originally cost. We also call it capital appreciation.
In most cases, we use the term when talking about real estate or financial investments.
Investors who go for capital appreciation have a higher risk tolerance than those who seek income. In other words, if you want income, you probably do not like taking risks.
Blue chip stocks provide moderate growth, while speculative investments may result in either impressive high growth or disappointing contractions.
Rental yields and capital growth
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.
There is an inverse relationship because it takes longer to sell properties where rents are high. That is what some economists say.
Most real estate experts, on the other hand, disagree. They say that both are possible in the same area. In other words, high yields plus capital growth are both possible in the same area. The secret, they say, is knowing where to invest.
Growth rates and average incomes
The main driver of properties’ capital growth is average income in a geographical area, rather than population size.
If an area has many people, but their average household income is low, capital growth will be slow. In fact, if their low incomes are not rising, there will probably be no growth.
However, areas where the average income is growing faster than nationally, tend to have high capital growth rates.
When you buy a property, you can take some steps to speed up capital growth. You can either add extensions or construct new buildings on the land. You can also improve the existing structures.
Income versus growth
When we are planning to invest, we first need to decide what we want. Do we want growth or income?
With financial investments, our income comes from dividends we earned from shares. We also receive income from interest paid on deposits.
Bonds and savings accounts are examples of income-producing investments that usually 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.