Education Briefing Property capitalisation rates –benchmarking the property market

Abstract

PurposeThe 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.Design/methodology/approachThis 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.FindingsLooking 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.Practical implicationsThe 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.Originality/valueThis is an Education Briefing discussing the construction and applicability of implicit valuation models using a market capitalisation rate.