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The paper is motivated by the paucity of empirical research on the determinants of capitalisation rates/yield in the commercial property market. Compared to property price determinants, the capitalisation rate has received significantly less attention. This is somewhat surprising given that the capitalisation rate is a more insightful indicator for investors on commercial property market performance than merely price changes or trends. The capitalisation rate, measured as the ratio of net operating income to the property’s capital value, captures the asset’s overall ability to generate income which is crucial for investors who typically invest in property for their income-generating capacity. The purpose of this paper is to address these issues.

To evaluate the determinants of capitalisation rates, time series analysis was used. The data capture performance in the Australian commercial property market between 2005 and 2018. All macroeconomic and financial data are freely available from official sources such as the Australian Bureau of Statistics and the nation’s central bank. Methodology wise, given the problematic nature of the data such as a mixed order of integration and the possibility of cointegration amongst some of the I (1) variables, the autoregressive distributed lag model was selected given its flexibility and relative lack of assumptions.

Bond rates, market risk premiums, stock market excess returns and other macroeconomic variables were found to drive capitalisation rates of Australian commercial properties. A 1% increase in the bond rate results in approximately 0.3–2.4% increase in capitalisation rates depending on the sub-market. Further, a 1% increase in excess market returns results in a 0.01–0.02% increase in capitalisation rates. Regarding risk premiums, a 100 basis point increase in the BBB spread results in approximately 0.92–1.27% reduction in cap rates in certain markets.

Asset managers will find these results useful in asset allocation strategies. Commercial properties offer attractive investment qualities such as yield stability in periods of economic uncertainty while allowing for the possibility of capital growth through appreciation of the underlying asset. By understanding the factors that affect the capitalisation rate, practitioners may predict emerging trends and identify threats to portfolio return and stability. This allows better integration of commercial property in the construction of portfolios that remain robust in a variety of market conditions.

The contribution to literature is significant given the lack of similar studies in the Australian market. The performance of real estate assets using cap rates as a comparative measure to equities and bonds influences decisions in asset allocation strategies. It provides crucial information for investors to estimate the performance of commercial property. This research supports the notion that both space and capital market indicators jointly affect capitalisation rates. The findings expand the knowledge base relating to commercial properties and validate the assessments of investors, developers and valuers who utilise yield as a performance benchmark for asset allocation strategies.

The purpose of this paper is to provide an integrated approach that combines the two methods usually used in the real estate appraisals, namely, the income capitalisation method and the hedonic model.

In order to pull out the link between the income capitalisation approach and the hedonic model, the standard hedonic price function is introduced into the basic model of income capitalisation instead of the house market value. It follows that, from the partial derivative, a direct relation between hedonic prices and discount rate can be obtained. Finally, by using the close relationship between income capitalisation and direct capitalisation, a mathematical relation between hedonic prices and capitalisation rate is also obtained.

The developed method allows to estimate the capitalisation rate using only hedonic prices. Indeed, selling and hedonic prices incorporate all of the information required to correctly estimate the capitalisation rate. Furthermore, given the close relation among going-in and going-out capitalisation rates and discount rate, the proposed method could also be useful for determining both the going-out capitalisation rate and the discount rate.

Obviously, it is always preferable to estimate the capitalisation rate by just using comparable transactional data. Nevertheless, the method developed in this paper is especially useful when: the rental income data are missing and/or not entirely reliable; the data on rental income and house price are related to different homes; the capitalisation rate, in fact, should compare the rent and value of identical homes. In these cases, therefore, the method can be a valuable alternative to direct estimation.

The large and important literature on real estate economics and real estate appraisal neglects the relationship between hedonic prices and capitalisation rate, thus considering the hedonic model and the income capitalisation approach as two separate and alternative methods. This paper, instead, shows that integration is possible and relatively simple.

This paper aims to propose a new valuation method for income producing properties. The model originally called cyclical dividend discount models (d’Amato, 2003) has been recently proposed as a family of income approach methodologies called cyclical capitalization (d’Amato, 2013; d’Amato, 2015; d’Amato, 2017).

The proposed methodology tries to integrate real estate market cycle analysis and forecast inside the valuation process allowing the appraiser to deal with real estate market phases analysis and their consequence in the local real estate market.

The findings consist in the creation of a methodology proposed for market value and in particular for mortgage lending determination, as the model may have the capability to reach prudent opinion of value in all the real estate market phase.

Research limitation consists mainly in a limited number of sample of time series of rent and in the forecast of more than a cap rate or yield rate even if it is quite commonly accepted the cyclical nature of the real estate market.

The implication of the proposed methodology is a modified approach to direct capitalization finding more flexible approaches to appraise income producing properties sensitive to the upturn and downturn of the real estate market.

The model proposed can be considered useful for the valuation process of those property affected by the property market cycle, both in the mortgage lending and market value determination.

These methodologies try to integrate in the appraisal process the role of property market cycles. Cyclical capitalization modelling includes in the traditional dividend discount model more than one g-factor to plot property market cycle dealing with the future in a different way. It must be stressed the countercyclical nature of the cyclical capitalization that may be helpful in the determination of mortgage lending value. This is a very important characteristic of such models.

This paper seeks to compare the capitalisation rate offered by the Government Superannuation Fund (GSF) to retiring GSF members with the alternatives of borrowing and sale of the pension entitlements.

The paper uses standard discounted cash flow techniques.

The principal conclusions are as follows: first, while up to 50 per cent of a GSF member's pension claims can be effectively sold, the restriction that the buyer must be an individual implies a band of possible sale prices with an upper bound equal to that prevailing if sales were unrestricted (present value). Second, borrowing is increasingly favoured over capitalisation as the retirement age declines, and the critical retirement age below which borrowing dominates capitalisation is 64 for men and 66 for women if the GSF member has a spouse at the retirement date and otherwise about three years less. Third, the present value of the pension benefits is well in excess of both the capitalisation rate offered by the GSF and the capitalisation rate implicit in borrowing, implying sale prices even well below present value that are superior to the better of capitalisation and borrowing.

The analysis treats the retirement age of a GSF member as exogenously determined. However, the analysis also provides insights into the optimal retirement age and this issue is currently the subject of further research.

The paper should provide guidance to GSF members who are contemplating capitalisation of their entitlements.

The purpose of this paper is to present a basic model of commercial real estate valuation in which the capitalization rate is the critical variable, and to present empirical results for a study of office building capitalization rates.

The model is derived from standard economic and financial theories. The empirical study uses data from the sale of office buildings in 37 downtown markets for 2012. The empirical results are related to concepts of asset market efficiency.

The empirical results show that capitalization rates depend on features of the office buildings, vacancy rate, and recent change in the office building market as captured by the vacancy rate. In other words, investors are using variables implied by standard economic and financial theory and basic economic data from the recent past to determine the capitalization rate.

The empirical results show how investors determine capitalization rates for office buildings, so potential investors can gauge the state of a property market.

The paper shows that changes in capitalization rates are predictable; investors use past data to adjust their capitalization rates. Furthermore, if an investor does not agree that current trends will continue, then the investment decision should be determined accordingly. For example, if an investor thinks that the future will not be as robust as the recent past, then other investors will bid more than the investor thinks is reasonable. However, if the investor sees a future that is brighter than the recent past, it is time to buy.

This study investigates the relation between residential property values and both property taxes and public services in Georgia’s counties. Capitalization theory predicts that property values relate negatively to property taxes, and positively to public services. Palmon and Smith (1998) state that errors in public service measures create a capitalization coefficient bias that makes it difficult to isolate tax effects from public service effects. This paper is a first step in defining and quantifying public services and their marginal effect on housing values. It develops public service measures in four quality-of-life areas – economy, education, health, and public safety. The models suggest a strong negative relation between effective tax rates and property values, and a significant positive association between the public service measures and property values. Analyses indicate that property taxes are capitalized into housing prices at greater than 100%, suggesting prior underestimations based on measurement errors in public service variables.

The purpose of this study is providing a possible methodological solution to the valuation of cyclical.assets. International Valuation Standards introduce a brand new definition of property: the cyclical asset (International Valuation Standards Council 2017, IVS 105, p. 39 and p. 41). Among different property valuation methods, normally this kind of properties is appraised using income approach. In this group of methodology, the opinion of value is based on a proportional relationship between property value and rent. In the past years, a group of methods called cyclical capitalization has been proposed (d’Amato, 2003; d’Amato, 2013;d’Amato, 2015; d’Amato, 2017a; d’Amato 2017 b; d’Amato, 2017c). This method proposes an integration between property valuation and property market cycle.

Cyclical capitalization method is applied using a time series of property market rent of offices in prime location in the South Bank area in London. It consists of the determination of more than one all-risk yield to reproduce the property market cycle.

A comparison between the cyclical capitalization and two traditional capitalization rate shows how the proposed model is able to provide a stable opinion of value.

The method may represent a contribution for the determination of the value of cyclical assets or for the mortgage lending value.

This paper provides the possibility to have a property valuation method less sensitive to upturn and downturn of the property market.

The valuation based on cyclical capitalization are less sensitive to the upturn and the downturn of the market.

It is one of the first scientific paper addressing the problem of the determination of the value of cyclical assets.

The purpose of this paper, which is the first of a two-part series, is to build upon the established research on environmental economics and sustainability theory developed by Ramsey (1928), Weitzman (2007) and Gollier (2010). The Ramsey-Weitzman-Gollier model, with the contribution of Howarth (2009) and Nordhaus (2007a, b), focuses on discount rate development for environmental and long-term assets, linking discounted utility analysis embedded in the CCAPM model of Lucas (1978) to the policy concerns associated with the valuation of public and sustainable resources. This paper further investigates these issues to the rates structure appropriate for exhaustible resources with a particular emphasis on urban land, based upon the differentiation of strong and weak form sustainability concepts constrained by the objectives of the sustainable criterion of Daly and Cobb (1994).

The paper integrates the concepts of discount rate development for environmental and long-term assets and discounted utility analysis to the policy concerns associated with the valuation of public and sustainable resources. It develops new theoretical insight in order to allow the theoretical formulation of discount and capitalization rates that can be empirically applied and tested.

The paper provides theoretical support for a new approach concerned with the development of capitalization and discount rates in the valuation of non-renewable resources. A key concern of valuing non-renewable or limited resource endowments (in space or time) is the problem of irreversible investment or irrevocable decision implementation as suggested by Arrow-Fisher (1974), Krautkraemer (1985) and Daly and Cobb (1994). It investigates the challenge with developing capitalization rates and valuation of depleting resources temporally, within the constraints of sustainability. To achieve this, an optimal control discounting procedure subject to a sustainable objective statement is employed – in this context it suggests that sustainability should be treated as an alternative to traditional growth and the maximization of near-term returns.

This paper extends the construct of developing rates structures appropriate for the valuation of exhaustible resources. It places a conceptual emphasis on urban land development. The measures developed and the insights gained may serve as a basis for future research on the optimal levels of sustainable development appropriate for different nations.

The aim of this Education Briefing is to comment upon the construction and role of the capitalisation rate in the valuation of property assets and how the implicit assumptions of growth are market derived and may be considered more robust than the use of growth explicit discounted cash flow (DCF) models where explicit growth assumptions can be questioned.

This Education Briefing will look at the role of analysing initial yields to derive market capitalisation rates, and it will look at component parts of the yield to isolate growth assumptions and compare property returns to the government bond market.

Looking at the Maltese market, the briefing shows that the valuer needs to be aware of the advantages and disadvantages of implicit and explicit valuation models.

The choice of valuation model is dependent upon the availability of suitable comparable information and the appropriateness of the model for the market in question. More transparent markets can benefit from the use of explicit models but where information is less available, such as the Maltese market, implicit models may be considered more robust at estimating market value.

This is an Education Briefing discussing the construction and applicability of implicit valuation models using a market capitalisation rate.

In 1996, an International Accounting Standards Committee (IASC) working party suggested that current methods of accounting for leases should be changed and in 1999 this work culminated in a position paper from the UK Accounting Standards Board (ASB) which made a number of suggestions for consultation (ASB, 1999). The paper assumes that the overall thrust of the proposed changes will be accepted and that will mean that occupying lessees will be required to capitalise the liability to pay rent for their lease and place that liability on the balance sheet. It will also require that property owners identify the value of the lease and the residual property value separately. These are by no means the only issues that are raised by the position paper but it is the implications of these two proposals for valuation methodology that is the subject of this paper. The property industry response in the UK to these two proposals is outlined and it shows that a minimalist approach is recommended, which incidentally is the preferred approach of the UK ASB. This paper argues that market valuations should already be carried out by techniques that attempt to identify the different values of the lease and the residual property value. The minimalist approach will replace one missing set of information with a misleading set, meaning that the IASC attempt to improve the ability of accounts to provide a “fair view” of companies will be thwarted. Alternative valuation models should be adopted which accurately appraise the assets and liabilities distributed by the lease and also identify the residual property value. Conventional market valuation approaches do not work in this context.