The brochure yield is a set of conventions. Diligence replaces each with a verified figure, and the yield is where the replacements meet.
Net initial yield is the rent actually receivable today, less the landlord's non-recoverable costs, divided by the price plus purchaser's costs. An illustrative multi-let building marketed at 22,500,000 on 1,560,000 of contracted rent is quoted at 6.93 per cent; on verified income of 1,370,000 and a gross price of 24,030,000 the net initial yield is 5.70 per cent, 123 basis points lower. Buying at a 6.25 per cent yield on those figures means paying 20,524,345, unless the vendor tops up the rent-free period.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The yield on the front of a sales brochure is a number the vendor's agent has chosen, and every one of its inputs is a convention: which rent, net of what, over which price. Due diligence exists partly to replace each of those conventions with a verified figure. The yield is where the replacements meet, and recomputing it line by line shows the committee exactly how much of the headline survived contact with the data room.
| Input | Value |
|---|---|
| Asking price, net of costs | 22,500,000 |
| Contracted rent on the tenancy schedule | 1,560,000 |
| Of which: a unit inside a rent-free period, 9 months left | 120,000 |
| Void costs on the vacant suite (service charge, rates, insurance) | 48,000 |
| Other irrecoverable costs (management, capped service charges) | 22,000 |
| Purchaser's costs: transfer tax, agency and legal fees (illustrative) | 6.8% |
| Buyer's target net initial yield | 6.25% |
The 6.8 per cent purchaser's costs is a level commonly used for larger UK investment deals; it is an illustrative input here, and the right figure is whatever transfer taxes and fees apply to the deal in front of you.
NIY = (rent receivable − non-recoverable costs) ÷ [price × (1 + purchaser's costs)]
In Excel: =(Rent-NonRec)/(Price*(1+6.8%)). The same identity solved for price gives the bid for a target yield: =(Rent-NonRec)/Target/(1+6.8%).
| Step | Yield | Change, bp |
|---|---|---|
| Vendor's quote: 1,560,000 ÷ 22,500,000 | 6.93% | |
| Rent actually receivable: 1,440,000, the rent-free unit excluded | 6.40% | −53 |
| Less 70,000 of non-recoverable costs: 1,370,000 | 6.09% | −31 |
| On the gross price of 24,030,000, including 1,530,000 of costs | 5.70% | −39 |
Each correction is ordinary. The rent-free unit is on the schedule at its contracted rent but pays nothing for nine months. The vacant suite costs the landlord its share of service charge, rates and insurance until it lets. Some management and capped service charge costs cannot be passed on. And the buyer pays 1,530,000 of tax and fees on top of the price. Together they take 123 basis points off the headline, and the largest single item is the one that is temporary.
On 1,370,000 of verified income and 6.8 per cent costs, a 6.25 per cent yield supports a net price of 20,524,345: 1,975,655, or 8.8 per cent, below the asking price. That is the bid if every correction is treated as permanent. They are not all permanent, and the distinction matters:
With the top-up in place, the 6.25 per cent target supports an effective net price of 22,322,097, a headline of 22,412,097 before the top-up is netted off. The gap between the two approaches, roughly 1.8 million, is the cost of capitalising a nine-month problem as if it lasted forever.
| Purchaser's costs | Gross price | Net initial yield | Net price for 6.25% |
|---|---|---|---|
| 1.8% | 22,905,000 | 5.98% | 21,532,417 |
| 4.5% | 23,512,500 | 5.83% | 20,976,077 |
| 6.8% | 24,030,000 | 5.70% | 20,524,345 |
| 8.0% | 24,300,000 | 5.64% | 20,296,296 |
Each point of purchaser's costs is worth about 5 basis points of yield at this level. That is small for one deal and decisive across borders: two buildings quoted at the same yield in markets with illustrative costs of 1.8 and 8.0 per cent are 34 basis points apart once both are put on a gross price. At the target, one basis point of yield is worth 32,892 of price.
The common mistake is to compare a verified yield with a quoted one. The vendor's 6.93 per cent is contracted rent over net price; the buyer's 5.70 per cent is receivable rent net of costs over gross price. Both are labelled "initial yield", and the 123 basis points between them is definition, not disagreement. The second mistake is to fix the definition and then price every difference as permanent, which is how a buyer talks itself out of a building the vendor would have sold at the right number with a top-up.
Recompute the yield in four steps: receivable rent, less non-recoverables, over price plus purchaser's costs. Here that takes 6.93 per cent to 5.70. Then price the permanent corrections into the bid and the temporary ones once. A blank model that takes quoted income to verified value, with permanent items capitalised and temporary ones costed once, is in the free files for the book; how to adjust a purchase price for a rent-free period works the top-up in detail, and what is a good cap rate puts the target in context. Where the rent will revert, the net initial yield is only the first year: how to calculate equivalent yield takes the same gross price through the reversion.
Rent receivable today, less the landlord's non-recoverable costs, divided by the price plus purchaser's costs. Illustratively, 1,440,000 of receivable rent less 70,000 of costs over a price of 22,500,000 grossed up by 6.8 per cent to 24,030,000 gives 5.70 per cent.
Because the buyer's outlay is the price plus transfer tax and fees, and the yield measures income on the outlay. An illustrative 6.8 per cent is often used for larger UK deals, but the right figure is the deal's own tax and fees; on the illustration it takes 39 basis points off the yield, from 6.09 to 5.70 per cent.
Exclude the rent from the receivable income, then remedy it once rather than capitalise it. In the example the unit pays nothing for nine months; a vendor top-up of 90,000 lets its rent count in full, and the yield at the asking price net of the top-up is 6.23 per cent rather than 5.70.
Chapter 9 of Real Estate Transaction Due Diligence takes quoted income to verified value; the free companion files include a model that capitalises permanent items and costs temporary ones once. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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