Reading 2.5: Real Estate

capitalization rate

commerical property earnings yield

how is cap rate found

dividing NOE by the property value

during stable periods- long run NOI growth rate should be close to

GDP growth

what is the cap rate used for

long term measure of risk dicsount rate on real estate property valuations

how are cap rates and rquired return related

factors that increase required return tend to increase cap rate

what mitigates the the cyclical sensitivity of cap rates

credit spreads bc they are countercyclical

what are the additional premiums added in real estate

term premium- bc of longer term

credit premium- risky tenant

equity risk premium- flucation in real estate values, leases etc

liquidity risk (2-4%)

what adjustments do you have to make to real estate to use in the equilibrium models (e.g. singer terharr)

• removed smoothing data

• -adjust for illiqudiity

over long hjorizons REITS have what correlation w direct real estate

high

adjustment so you can compare REITS to direct holdings

Reits use a lot of leverage

so unlever

why do REITS preform better than direct

capture liquidity risk premium (they get the liquidity premium from the buildings but they themselevs are liquid)

and professional mgmt

return and vol of retail reits, industrial, apartments and offices

retail: highest return, second lowest vol

industrial: lowest return, highest vol

directly owned:

• apartments: highest return

• offices: lowest return

what is the largest class of developed properites

residential real estate (75%) of global value