The net initial yield is the ratio of net rental income and gross purchase price of a property. The term’s interpretation varies across the international property industry. For example, net rental income and the gross purchase price can be defined differently in some cases.1
The German Society of Property Research (gif) therefore developed a standard to apply to the property industry in practice. In line with this, the net initial yield is calculated as follows:
Figure: Net initial yield
Source: Gesellschaft für Immobilienwirtschaftliche Forschung e. V. (2011): Netto-Anfangsrendite. Abrufbar im Internet. URL: http://www.gif-wiki.de/w/Netto-Anfangsrendite, Stand: 10.08.2015.
Annual net rental income is net of non-recoverable operating costs. The gross purchase price is the purchase price plus additional acquisition costs such as brokerage fees, property transfer tax, notary and legal costs, etc.2
The net initial yield therefore adds the components of non-recoverable operating costs and additional acquisition expenses to the gross initial yield. Thanks to its quick and simple calculation and its low complexity, the net initial yield is a key performance indicator for the assessment of property investments. It allows an investor to compare with other objects and to assess relative cost-effectiveness. However, due to the static analysis it says little about the future development of the property. Key assessment criteria such as the current rental situation, the state of repair or the potential to increase rent are therefore not taken into account.3
Nevertheless, the indicator is highly popular thanks to its lack of complexity. It is often used together with the gross initial yield as the sole measure of return for assessing a property investment. This type of static analysis limited to a single point in time can lead to a massive misjudgement of the actual economic performance of a property, however.