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A Study on Factors Affecting the

Capitalization Rate on US Real


Estate Industry

Harish. V
0929047
US Real Estate Industry
• Real estate in United States is one of the
largest markets in the world
• The US real estate market is divided into 2
sectors:
– Commercial real estate (i.e. offices, shopping
malls, factories, warehouses and other commercial
buildings.)
– Residential real estate. (i.e. houses)
Major Participants in the Real
Estate Industry
• Developers
• Appraisers
• Property managers
• Brokers/ Leasing Agents
• Lenders
About ZENTA
• Zenta which is founded in 2001 is a world-
class knowledge process outsourcing (KPO)
and serves in the area of Consumer Credit
services, Insurance and Financial Services, and
Commercial and Residential Real Estate
services.
• It also pioneered the concept of developing
and delivering higher level offshore solutions
for the real estate industry
CAPITALIZATION RATE
• The capitalization rate in the real estate literature
refers to the ratio of Net Operating Income to
property value.
• Most investors associate movements in cap rates with
changes in asset values, e.g., falling cap rates signal
rising property values-changes in income or asset
prices (or both) can cause cap rates to move up or
down.
• The Cap rate may vary in different areas of a city for
many reasons such as desirability of location, level of
crime and general condition of an area.
Cont’d
• The cap rate (R) equals (expected) net
operating income NOI1 divided by the
value of the property (V) as follows
(Ellwood, 1970),
Cap rate for various property types from
2005 – 2010
FACTORS AFFECTING THE
CAPITALIZATION RATE
• Property Type
• Location
• Loan to Value
• Age of the Property
• Mortgage Constant
• Lease Term
• Interest Rate
• Discount Rate
• Inflation
• Number of Tenants
• DSCR
NEED FOR THE STUDY
• The purpose of this study is to facilitate the company
to value the property in various states of US Real
Estate market using the capitalization rate which in
turn enables the company to analyze and recommend
investment strategies for clients such as lending
institution, bankers or owners etc through a risk
return analysis of the income streams of different
commercial and Real estate properties.
SCOPE OF THE STUDY
• The project seeks to study the various factors
to be considered while estimating the
capitalization rate.
• To understand the most relevant and reliable
methodology for income producing properties.
• To conclude a market value for some subject
property in US real estate market.
OBJECTIVES OF THE STUDY
PRIMARY OBJECTIVES:
To scrutinize the vital factors which affects the capitalization
rate of the property and to find out the importance of each
factor.
SECONDARY OBJECTIVES:
• To study the impact of property type in determining
capitalization rate.
• To determine the effect of location in Real estate market.
DATA COLLECTION
For the purpose of the study, secondary data was
collected through,
• The materials available about US real estate in
various websites like realestatejournal.com,
realtyrates.com, bloomberg.com.
• The materials maintained in the organization about
the properties.
• Research publication of other institutes and
organization like REIS, PULASKI, CBRE.
LITERATURE REVIEW
• Ambrose, B. and H.O. Nourse. 1993. Factors Influencing
Capitalization Rates, Journal of Real Estate Research.
• Evans, R. 1990. A Transfer Function Analysis of Real Estate
Capitalization Rates, Journal of Real Estate Research.
• Froland, C. 1987. What Determines Cap Rates on Real Estate,
Journal of Portfolio Management.
• Jud, D., and D. Winkler. "The Capitalization Rate of
Commercial Properties and Market Returns." Journal of Real
Estate Research.

The above researchers made a detailed study about


Capitalization rate and have built a various dynamic
Cap rate models for the use of investors so that they
can use these models to predict Cap rates based on
past information