Net initial yield
Net initial yield is the ratio between the expected net operating income in the first 12 months of the purchase year and the purchase price of a building. The figure is expressed as a percentage and reads as "the running return a buyer gets on day one", before gearing, before growth and before reinvestment. If an office building sells for NOK 500 million with an expected net rent of NOK 25 million in year one, the net initial yield is 5.0%.
The term is almost always used about transactions, not about valuations, and is therefore reported in quarterly yield statistics from brokerages such as Akershus Eiendom, Newsec and DNB Næringsmegling. Unlike prime yield, which describes the very best buildings in the best locations, net initial yield is a figure actually observed for the individual sale: prime yield is a category, net initial yield is a measurement. Two sales in the same week can have completely different net initial yields depending on the age of the building, the tenant portfolio and the remaining lease term.
The figure is defined as net and therefore includes deductions for running operating costs, owner's costs, vacancy, normal maintenance and tenant fit-out. Gross initial yield (without these deductions) is used less often in Norway, but it does appear in press releases and should be read critically. A difference of 50 to 100 basis points between gross and net is common. In practice, the analyst should ask for an itemised cash flow model before accepting a net initial yield as a genuine comparison figure.
Net initial yield is primarily a snapshot and does not capture the fact that rental income often grows faster or more slowly than operating costs over the lease period. A building with short remaining leases below market level can have a low net initial yield today and a high reversionary yield when the leases roll over to market rent. The buyer's total return is then higher than the net initial yield suggests on its own. Conversely, a building with long, overpriced leases will have an attractive net initial yield today and a negative reversion effect when the leases are renewed. Professional investors therefore read net initial yield together with the internal rate of return from a discounted cash flow to capture both effects.
In Placepoint you can retrieve lease data, tenants and remaining lease term from the property panel when you compare a stated net initial yield with the actual lease conditions in the building.
How it looks in Placepoint
In Placepoint you find this in Property panel - Units and Tenants:
From Placepoint's glossary: Net initial yield
More information: Eiendom Norge: Market reports, Akershus Eiendom: Market Report, Store norske leksikon: avkastning
English: Net initial yield (NIY).
Frequently asked questions
What is the difference between net initial yield and yield?
Yield is the overall term for the running return on a property investment. Net initial yield is a specific variant: the ratio between the net rent for the first twelve months of the purchase year and the purchase price. Other yield variants (passing yield, reversionary yield, exit yield) use other numerators or other points in time.
Why is net initial yield a better transaction figure than gross?
The gross figure ignores the fact that a buyer never keeps the full rent amount: owner's costs, vacancy, maintenance and management are deducted. The net figure gives a more realistic picture of the running cash flow, and it is the figure the brokerages report in their quarterly overviews.
What is the difference between net initial yield and capitalisation rate?
Net initial yield is an observed return from an actual transaction. The capitalisation rate is the discount rate an analyst sets in a valuation model. In practice, the capitalisation rate is often set on the basis of observed net initial yields for comparable buildings.
Why does net initial yield vary between transactions?
The age of the building, the location, the tenants' creditworthiness, the remaining lease term and the segment (office, warehouse, retail) all affect the risk in the cash flow. Lower risk gives a lower net initial yield and a higher price. A new building at Aker Brygge with a 12-year lease to a state tenant can trade at 4.5%; an older office building in Stavanger with rolling small tenants can be at 7% to 8%.