2026-10-10 11:20

What is NOI, and how does net yield differ from initial yield?

NOI (net operating income) is annual rent minus the costs the owner cannot pass on to the tenant; loan interest, depreciation and taxes are not part of it. "Initial" means the first year's yield, "net" means the yield after all costs, and the advertised initial yield is usually gross: rent divided by price. In our series' example, a €10 million supermarket with €500,000 of rent is marketed at 5.0%, while its net initial yield is about 3.9%.

NOI comes before debt and tax, so it compares properties

NOI describes the property, not its owner. Its counterpart in German valuation is net income (Reinertrag): gross income minus the costs of running the property (Bewirtschaftungskosten) that the tenant's payments do not cover. These include management, maintenance and the risk of lost rent (§§ 31, 32 ImmoWertV). For a food store whose roof and structure (Dach und Fach) the landlord maintains, the valuation standards allow 3% of rent for management and 4% for the risk of lost rent. Maintenance is set at €5.85 per m² a year at 2021 prices (Annex 3 to the ImmoWertV).

In our experience, non-recoverable costs come to 8–15% of net rent for a new supermarket with a modern lease, and more for older stores and weaker leases (see Part 10 of the series German Prime Retail). NOI excludes interest and loan repayments, depreciation (AfA) and taxes on profit, which depend on the owner's financing and tax position; acquisition costs go into the denominator. Nor does annual NOI show major replacements, such as a roof or the car-park surface: professional owners set aside a reserve for them in advance (Part 10).

Net initial yield reflects both non-recoverable and acquisition costs

Exhibit 1. Non-recoverable costs and acquisition costs turn an advertised 5.0% into 3.9%

Line of the calculation	Amount, €
Net rent	500,000
Non-recoverable costs, 15% of rent	−75,000
NOI	425,000
Purchase price	10,000,000
Real estate transfer tax, Lower Saxony, 5.0%	500,000
Notary and land register	58,000
Broker, 3% plus VAT	357,000
Due diligence	30,000
Total invested	10,945,000
Gross yield: rent to price, %	5.0
Net initial yield: NOI to total invested, %	3.9

Source: the example from Parts 10 and 11 of the series — a new supermarket in Lower Saxony with a 15-year lease; non-recoverable costs at the upper end of the 8–15% range.

Gross yield is rent divided by price: €500,000 on €10 million gives 5.0%, or 20 times annual rent. After non-recoverable costs, 4.25% on the price remains; add acquisition costs of 9.4% to the price, and the result is 3.9%. That figure, NOI divided by the total outlay, is the net initial yield (Nettoanfangsrendite). If the GmbH opts to charge VAT on the rent, it can reclaim about €63,500 of VAT on the notary's and broker's fees, but the result barely changes (Part 11).

"Initial" means year one: with indexation, NOI grows

Initial yield is a snapshot at the date of purchase. If rent rises by 1.4% a year, as in the Part 11 forecast, it reaches €566,600 by year ten, and NOI at the same 15% costs about €481,600 — 4.4% on the original outlay (our calculation). That is no promise: indexation usually takes effect only above a threshold and passes on only part of the rise in prices.

BNP Paribas Real Estate's benchmark for the best supermarkets, 5.00% in Q3 2026, is also a net initial yield, but on the broker's method, so compare it only with a calculation from the same source. Debt and taxes come after NOI: they decide how much cash reaches the investor, but no ownership structure will raise the yield of the property itself (Part 11).

Implications for investors

1. Ask the seller for NOI, not a yield. Request the list of deducted costs and check it against the lease: roof, structure, car park and management decide how much of the rent remains.

2. Calculate the yield on the total outlay. Compare properties on net initial yield: NOI divided by the price plus transfer tax, notary, broker and due diligence.

3. Remember that initial yield describes only the first year. Indexation can lift NOI, while major replacements of roofs and surfaces do not show in annual NOI and need a reserve.

What to check:
• the seller's NOI calculation with the list of deducted costs, against the cost allocation in the lease;
• who bears the roof, the structure, the car park, insurance and management;
• acquisition costs at the rates of the property's federal state, including the broker if you pay one;
• the basis of the calculation: the rent in force under the lease, not the rent expected after indexation;
• the source and date of the market benchmark: compare only with a calculation from the same broker.

Sources: §§ 31, 32 ImmoWertV and Annex 3 to the ImmoWertV; BNP Paribas Real Estate, German retail investment market report for Q3 2026; Gordon Real Estate Group calculations; the series German Prime Retail, Parts 10 and 11. Legal position as of 10 October 2026.

Photo: Jan-Philipp Thiele / Unsplash

This page is general information and not investment, legal or tax advice.

Ilya Gordon