What’s in an Italian Property Yield?

EPRA (European Public Real Estate Association) publishes comprehensive guidance on standardised property performance indicators, including a definition of a net initial yield;

“Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers’ costs.”

In Italy, other than quoted property companies, the market very rarely adopts the EPRA definition.

In the past, yields were typically quoted gross – gross rent before deduction of non-recoverable costs divided by the net price, before addition of purchaser’s costs.  This made sense at a time when non-recoverable costs were low and purchaser’s costs were modest.  It is still used by many in the local market today.  If the yield isn’t specifically referred to as a net yield, assume it is gross.

The institutional market is moving towards a net yield definition.  Adopting the wording of EPRA, we can say an Italian net yield (as typically stated by agents, owners and researchers) is;

“Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, ignoring (estimated) purchasers’ costs.” [our bold / underline].

Where the non-recoverable costs are:

·         IMU – a municipal property owners’ tax.  Calculated as a rate on a theoretical rental (rendita catastale).  As a rough rule of thumb it can be around 15% of market rent, but may vary substantially, to as high as 25% of income.

·         Lease registration tax – an annual charge equal to 1% of the passing rent, usually split equally between tenant and landlord.

·         Property Insurance and Property management (not always allowed for). 

Purchaser’s costs are rarely allowed for in reporting yields, even though these can be a significant additional cost, the reason usually given being that the costs vary according to the nature of the transaction.  

Transaction costs are a complex issue and tax advice should be sought.   Having said that, most commercial transactions will involve either a sale of property subject to VAT, or a sale of units in an SPV.  This is an area for further diligence in each specific case, but generally, transfer taxes for Vatable buildings will be either 2% of the contract price where a fund managed by an authorised fund manager (SGR) is a party to the transaction, or otherwise 4%.  VAT is normally subject to the reverse charge mechanism, unless it has recently been constructed / subject to refurbishment.  Share sales are subject to a stamp duty of €200.

Always seek legal and tax advice on tax implications of purchase and sale of real estate in Italy.