Exit yield sensitivity: connecting NOI, valuation and equity proceeds

Match the yield to the income

For a simple capitalisation, gross value = stabilised annual NOI divided by exit yield. Specify whether NOI is the next twelve months' projected income or another period, and whether it includes rent-free periods, management fees and recurring costs. A comparable yield is meaningful only on a compatible income basis.

RICS discounted cashflow guidance defines exit yield and discusses terminal value within a valuation. An exit yield is an assumption requiring evidence. It should not be selected merely to produce the investor return required by the business plan.

Sources: RICS: Discounted cash flow valuations

Calculate proceeds after the sale deductions

In this invented case, exit NOI is 1.5 million, the exit yield is 6%, selling costs are 2% of gross price and debt repayment is 14 million. Gross value is 25 million. Selling costs are 0.5 million, leaving 10.5 million of equity proceeds after debt. No tax, accrued interest or other closing liabilities are included.

The 25 million valuation is not an investor distribution. Put the full bridge in the model so a change to selling costs or repayment is visible instead of being buried in a net yield.

Explain why equity moves more than value

Moving from 6% to 6.5% reduces gross value by about 7.69%, but equity proceeds fall by about 17.95%. Debt repayment is fixed in this comparison, so the value movement falls on the smaller equity remainder. This is a financing effect, not evidence that the valuation itself changed by 17.95%.

If debt floats with value because a cash sweep or refinance occurs before exit, the proceeds bridge must be recalculated. Keeping debt fixed is a disclosed sensitivity assumption, not a universal property of leveraged investments.

Stress income alongside the yield

Suppose NOI falls 10% to 1.35 million and the exit yield rises to 6.5%. Gross value becomes 20.769231 million. After 2% selling costs and the same 14 million debt, equity proceeds are 6.353846 million. That is approximately 39.49% below the 10.5 million base outcome.

Present a two-dimensional table of NOI and yield with the same disposal date. Then run a timing scenario separately. Delaying the sale may change rental income, capital expenditure, accrued financing costs and the annualised equity return even if the ultimate valuation is unchanged.

Check the terminal-year accounting

Confirm that sale value and operating cashflow do not count the same income twice. For example, next-year NOI used to capitalise value should not also be included as cash received after the asset has been sold. State any working-capital release and deposits transferred to the buyer.

A useful decision paper reports gross value, net sale proceeds, debt repayment and equity proceeds side by side. Include the source and date of the yield evidence, the condition of the asset assumed at exit and the cost required to reach that condition.