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Article
Publication date: 24 January 2023

Woon Weng Wong, Kwabena Mintah, Kingsley Baako and Peng Yew Wong

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Practical implications

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.

Originality/value

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.

Details

Journal of Property Investment & Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 30 November 2021

David Fleischman, Popi Sotiriadou, Rory Mulcahy, Bridie Kean and Rubiana Lopes Cury

This paper aims to investigate capitalization support, an alternative perspective for theorizing social support in-service settings. In the service setting of the…

Abstract

Purpose

This paper aims to investigate capitalization support, an alternative perspective for theorizing social support in-service settings. In the service setting of the student-athlete experience, the relationships between capitalization support service dimensions (i.e. the academic, athletic, self-development and place dimensions), well-being and sports performance are examined through a transformative sport service research (TSSR) lens, a newly introduced form of transformative service research (TSR).

Design/methodology/approach

Data from an online survey of Australian student-athletes (n = 867) is examined using partial least squares structural equation modeling.

Findings

The results support the theorized service dimensions of capitalization support, indicating their validity and relevance to the student-athlete experience. Further, the results demonstrate that all capitalization support dimensions except athletic support (i.e. academic support, place support and self-development support), have a direct effect on well-being and an indirect effect on sports performance.

Originality/value

This research is unique for several reasons. First, it introduces a new perspective, capitalization support, to theorizing about social support in services. Second, it is one of the first studies in both TSR and TSSR to empirically test and demonstrate a relationship between support services, well-being and performance in a single study. Insight into how to design services to optimize well-being in relation to other service objectives like performance thus emerges.

Article
Publication date: 18 January 2023

Shuming Bai, Kai S Koong and Yanni Wang

China adopted its new Accounting Standards for Business Enterprises No. 6 in 2007, which substantially converges with the International Financial Reporting Standards. It…

Abstract

Purpose

China adopted its new Accounting Standards for Business Enterprises No. 6 in 2007, which substantially converges with the International Financial Reporting Standards. It stipulates that firms operating in China shall capitalize development costs provided specific criteria have been met. This paper aims to examine the effects of the new accounting policies of R&D on the value-relevance and stock performance of 36,299 Chinese firms-years from 2007 to 2020.

Design/methodology/approach

A comprehensive multi-stage analysis was conducted. Multiple linear regressions were performed on the pooled cross-sectional time-series total R&D, capitalized expenditures, expensed costs and other key financial factors to test for the effects of R&D on the stock prices, contemporaneous stock returns and subsequent stock returns for the full sample, capitalizer sample and expenser sample, respectively.

Findings

First, majority of Chinese firms (about 80% of those reported) elect to adopt expensing R&D approach, while about 20% deploys capitalization treatment. Second, key attributes such as size, profitability, leverage and R&D intensity are highly associated with capitalization propensity. Third, current capitalization affects the contemporaneous stock prices and stock returns (priced-in) with yearly volatility. Finally, intertemporal association exists between firms’ expensing costs and subsequent returns due to a delayed reaction.

Originality/value

As the world largest emerging economy, the results show that research and development information adds value, and capitalizers outperforms expensers in the area of stock performance. This strategy works irrespectively of economic development stage or capital market maturity. The findings call for more capitalization.

Details

International Journal of Accounting & Information Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 1 March 2006

Russel Poskitt and Peihong Yang

This study investigates the impact of the enhanced continuous disclosure regime introduced in December 2002 on several measures of information risk in NZX‐listed stocks…

Abstract

This study investigates the impact of the enhanced continuous disclosure regime introduced in December 2002 on several measures of information risk in NZX‐listed stocks. We employ two microstructure models and an intraday data set to measure information risk in a sample of 71 stocks. Our empirical results show that the reforms enacted in December 2002 had no significant effect on either the level of information‐based trading or the adverse selection component of market spreads in our sample of NZX‐listed stocks.

Details

Pacific Accounting Review, vol. 18 no. 1
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 21 February 2019

Gaetano Lisi

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

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Practical implications

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.

Originality/value

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.

Details

Journal of Property Investment & Finance, vol. 37 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 7 April 2015

John McDonald

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…

1272

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Practical implications

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

Originality/value

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.

Details

Journal of Property Investment & Finance, vol. 33 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 7 August 2017

Maurizio d’Amato

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…

Abstract

Purpose

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).

Design/methodology/approach

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.

Findings

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 limitations/implications

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.

Practical implications

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.

Social implications

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.

Originality/value

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.

Details

Journal of European Real Estate Research, vol. 10 no. 2
Type: Research Article
ISSN: 1753-9269

Keywords

Article
Publication date: 27 July 2012

Konstantinos Drakos

The purpose of this paper is to investigate whether there are any differences in the capitalization speed‐of‐adjustment across regulatory capitalization buckets of…

Abstract

Purpose

The purpose of this paper is to investigate whether there are any differences in the capitalization speed‐of‐adjustment across regulatory capitalization buckets of commercial banks in the USA, for the period 2002‐2009.

Design/methodology/approach

The Federal Deposit Insurance Corporation (FDIC) monitors banks' capital ratio using the bucketing approach. Thus, this discrete and ordered variable is modeled in the context of a partial adjustment specification, controlling for initial conditions and cross‐sectional heterogeneity. Parameters are estimated with the generalized dynamic random effects ordered probit technique that is flexible enough to allow for differential effects of covariates across capitalization categories.

Findings

The main result is that the speed of adjustment is monotonically increasing for banks belonging in lower capitalization buckets, after controlling for bank‐specific capitalization determinants. In addition, substantial differential impacts of capitalization drivers across regulatory buckets are uncovered.

Practical implications

This an important finding both for regulators and market participants since it sheds light on a very crucial aspect of banks' behaviour.

Originality/value

This is the first paper that adopts the FDIC bucketing in the actual modelling. In addition, it uses the generalized dynamic random effects ordered probit technique in order to explore potential differential impact of capital ratio determinants across buckets.

Details

Journal of Financial Economic Policy, vol. 4 no. 3
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 5 February 2021

Ying Zhang, Xing Lu and Wikrom Prombutr

The authors investigate the extent to which online talk can influence contemporaneous and future stock trading, especially when market news is unpresented.

Abstract

Purpose

The authors investigate the extent to which online talk can influence contemporaneous and future stock trading, especially when market news is unpresented.

Design/methodology/approach

The authors propose an improved sentiment formula incorporating online hype, neutral sentiment and poster reputation. In addition, they conduct event study, OLS regression analyses and probit models.

Findings

First, investors tend to be more talkative in relation to firms that are (1) smaller size, (2) more growth-like, (3) with lower prices and higher short interests and (4) of higher beta. Second, the bullish tone of investors positively affects the abnormal returns of small-capitalization stocks. However, online talk has little impact on large-capitalization stocks, except that more postings boost trading liquidity. Third, online talk predicts the presence of future news regardless of firm size, with stronger predictive power found for small-capitalization stocks.

Practical implications

It is of interest to practitioners and researchers to study online talk so as to better understand the trading psychology of retail investors and the effects on the stock market. Furthermore, policymakers are interested in tracking activities on stock message boards in order to prevent security fraud and protect investors' interests.

Originality/value

The results are robust and suggest that online talk has significant impacts on stock trading exploiting an information asymmetry. This study of stock message board posting activities helps researchers to understand whether message contents contain valuable and unique content compared with information available via more traditional media channels.

Details

Review of Behavioral Finance, vol. 14 no. 2
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 23 November 2010

Martin Lally

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…

Abstract

Purpose

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.

Design/methodology/approach

The paper uses standard discounted cash flow techniques.

Findings

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.

Research limitations/implications

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.

Originality/value

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

Details

Pacific Accounting Review, vol. 22 no. 3
Type: Research Article
ISSN: 0114-0582

Keywords

1 – 10 of over 10000