NOI, Cap Rates and IRR: Asset Management Metrics Explained

TL;DR

Three numbers define the financial DNA of every Irish commercial real estate investment: Net Operating Income (NOI) is the asset's annual cash earnings; cap rate is NOI as a percentage of value; IRR is the time-weighted total return over the hold period. NOI is operational. Cap rate is a snapshot. IRR is the answer to 'did the investment work'. This article explains each, how they connect, and what good numbers look like in 2026.

Net Operating Income (NOI)

NOI is gross rental income, plus other ancillary income, minus all operating expenses (excluding debt service, depreciation, capex and tax). It is the annual cash the asset throws off before financing.

Formula: NOI = Effective Gross Income minus Operating Expenses.

What's included in operating expenses: management fees, common-area maintenance, property tax (rates), insurance, utilities not recovered from tenants, repairs.

What's NOT included: mortgage interest, principal repayment, capex on the building itself, depreciation, income tax.

NOI is the foundation. Every other metric flows from it.

Cap rate (capitalisation rate)

Cap rate is NOI divided by current market value, expressed as a percentage. It's how property is priced.

Formula: Cap rate = NOI / Value.

Reverse formula: Value = NOI / Cap rate.

If an Irish office produces NOI of 500,000 euro and the market cap rate is 6 percent, the value is 500,000 / 0.06 = 8.33 million euro.

Cap rate is sometimes called 'all-risks yield' in Irish and UK practice. Lower cap rate means higher value for the same income (the asset is priced more aggressively); higher cap rate means lower value (more risk priced in).

Indicative 2026 prime Irish cap rates: Dublin Grade-A offices 5.25 to 5.75 percent; prime logistics 5.0 to 5.5 percent; prime retail 5.5 to 7.0 percent; secondary stock 7 to 9 percent.

Internal Rate of Return (IRR)

IRR is the discount rate that makes the net present value of all cash flows (initial equity, ongoing distributions, sale proceeds) equal to zero. In simpler language, it's the annualised total return on the investor's equity across the hold period.

IRR captures three things that cap rate misses: leverage, time, and capital appreciation. An asset can have a 5.5 percent cap rate and a 12 percent levered IRR — the IRR includes loan amortisation, value growth at exit and the impact of debt cost.

Indicative 2026 Irish IRR targets: core institutional 6 to 8 percent unlevered, 9 to 12 percent levered; value-add 13 to 17 percent levered; opportunistic 18 percent plus levered.

How they connect: a worked example

A Dublin office acquired for 10 million euro produces NOI of 600,000 in year 1 (cap rate 6 percent). Held for 5 years with 3 percent annual NOI growth. Sold at exit on a 5.75 percent cap rate.

Year 5 NOI = 600,000 times 1.03 to the power of 4 = 675,000. Exit value = 675,000 / 0.0575 = 11.74 million.

Over the hold, the investor received 5 years of NOI (totaling roughly 3.2 million) plus the capital gain at exit (1.74 million). Unlevered IRR works out to approximately 8.5 percent.

If the asset was acquired with 60 percent debt at 6 percent interest, the levered IRR rises to roughly 12 to 13 percent — illustrating why financing structure is as material as the asset itself.

What asset managers track alongside these three

WAULT (weighted average unexpired lease term) — how long the income is contracted for; capex spend vs budget — whether the business plan is being executed; ERV vs passing rent — reversionary potential at next review; occupancy and arrears — operational health; debt service coverage — financing risk.

Frequently asked questions

How is NOI calculated for an Irish commercial property?

NOI equals effective gross income (rental income plus ancillary income, minus vacancy and bad debt) minus operating expenses (management, service charge if not recovered, rates, insurance, non-recoverable repairs). Debt service, capex and tax are not included.

Is cap rate the same as yield?

In Irish and UK practice cap rate and 'all-risks yield' refer to the same metric: NOI divided by value. American 'cap rate' and Irish 'yield' are functionally identical, though Irish valuation reports often quote yields rather than cap rates.

What IRR is considered good for Irish commercial real estate?

Indicative 2026 targets: core institutional 6 to 8 percent unlevered or 9 to 12 percent levered; value-add 13 to 17 percent levered; opportunistic 18 percent plus levered. Targets vary materially with risk profile and capital source.

What is the difference between cap rate and IRR?

Cap rate is a snapshot — the price of income today. IRR is a time-weighted total return over the hold period. Cap rate doesn't capture leverage, capital growth or the time profile of cash flows; IRR does. They answer different questions.

Why is NOI calculated before debt service?

NOI is a property-level metric. It allows comparison of one asset to another regardless of how each is financed. Once NOI is established, levered cash flow is calculated by subtracting debt service from NOI to derive cash on cash and levered IRR.

HPS Real Estate provides asset management and investment advisory for institutional investors, REITs, family offices and corporate occupiers across Ireland. Contact info@hpsproperty.ie.