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A study of micro-level variation in appraisal-based capitalisation rates
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.
2009 (English)In: Journal of Property Research, ISSN 0959-9916, E-ISSN 1466-4453, Vol. 26, no 3, 235-263 p.Article in journal (Refereed) Published
Abstract [en]

This paper explores how appraisal-based going-in and exit capitalisation (cap) rates vary on the micro-level, i.e. how they differ from property to property. The studied database consists of 3022 discounted cash flow market valuations of office properties in Stockholm, Gothenburg and Malmö during 1998-2004. The purpose of the paper is to test the 'rationality' of Swedish office property valuations. By rationality is meant the extent to which appraisals, in particular appraisal cap rates, follow from economic theory. This is an important issue since commercial property markets rely heavily on valuations. Cap rates are regressed on characteristics of the property, other valuer assumptions regarding the property (i.e. the property's market rent) and variables that capture broad time series variation in cap rates. For the most part the studied appraisals follow the expected pattern. They do not exhibit major evidence of irrationality in the above mentioned sense though some of the findings point to the need for further research.

Place, publisher, year, edition, pages
2009. Vol. 26, no 3, 235-263 p.
Keyword [en]
Appraisal, Appraiser behaviour, Capitalisation rate, Micro-level variation, Office, database, property market, property rights, regression analysis, time series analysis, valuation, Goteborg, Malmo, Skane, Stockholm [Sweden], Sweden, Vastra Gotaland
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:kth:diva-26102DOI: 10.1080/09599911003669682Scopus ID: 2-s2.0-77954825614OAI: oai:DiVA.org:kth-26102DiVA: diva2:370037
Note
Uppdaterad från manuskript till artikel QC 20101115Available from: 2010-11-15 Created: 2010-11-15 Last updated: 2017-12-12Bibliographically approved
In thesis
1. Empirical studies of property appraiser behaviour and of location value in office rents
Open this publication in new window or tab >>Empirical studies of property appraiser behaviour and of location value in office rents
2007 (English)Licentiate thesis, comprehensive summary (Other scientific)
Abstract [en]

In the first paper the effect of accessibility upon rent is investigated for office properties located in Downtown Stockholm. Starting from the firm’s cost minimization problem, a translog hedonic model is derived. The results suggest the model has good predictive power in explaining the variation in the log of the rent. A negative rent gradient is obtained with a base approximately 90 meters from the postulated focal point. It appears as if Space Syntax adds important information to the understanding of the intraurban office rent pattern.

The second paper investigates assumed capitalisation rates in 3026 discounted cash flow valuations of office properties in Stockholm, Gothenburg and Malmö during the time period 1998-2004. The study investigates determinants of property-level variation in cap rates and how going in and exit cap rates relate to each other.

Exit cap rates exhibit substantial variation across properties. Part of this cross-sectional variation can be attributed to the location of the property, part of it is due to other characteristics of the property. Exit cap rates are differentiated between properties of the same type on the same market segment, which shows that valuers apply property level fine-tuning when setting exit cap rates. Properties with low market rent and high long-run vacancy assumption typically have high exit cap rates. Properties in peripheral parts of a city typically have higher exit cap rates than properties in central parts.

The implicitly assumed going-in cap rate (defined as assumed net operating income year one divided by estimated market value) follows a similar pattern as the exit cap rate but exhibits more temporary, property-specific variation. Going-in cap rates are strongly influenced by temporary deviations of vacancy rates and rents from assumed “normal” levels of vacancy and rent. The difference between going-in and exit cap rates is influenced by assumed short-run growth in net operating income in the way stipulated by theory: high assumed short-run growth is associated with going-in cap rates being lower than exit cap rates.

Place, publisher, year, edition, pages
Stockholm: KTH, 2007. 5 p.
Series
Trita-BFE, ISSN 1104-4101 ; 7/79
Keyword
Space Syntax, translog, hedonic model, office space, rent, Stockholm, property appraisal, capitalization rate, appraiser behaviour
National Category
Economics and Business
Identifiers
urn:nbn:se:kth:diva-4549 (URN)978-91-975984-7-7 (ISBN)
Presentation
2007-12-14, L52, KTH, Drottning Kristinas väg 30, Stockholm, 10:00
Opponent
Supervisors
Note
QC 20101115Available from: 2007-11-22 Created: 2007-11-22 Last updated: 2011-11-10Bibliographically approved
2. Essays on lease and property valuation
Open this publication in new window or tab >>Essays on lease and property valuation
2010 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The first two papers in this dissertation discuss a fairly recently developed research field, Space Syntax, and how the findings in this field may be used to understand spatial economic patterns such as geographic distribution of market rents. Both papers use standard econometric methods to investigate the relationship between rents and the so called integration value developed within Space Syntax. The integration value may be understood as a measure of the accessibility of a certain location in a street network. The measure is constructed using tools from graph theory and uses the shape of the street network as its only input. The papers estimate hedonic models of office and retail leases from central Stockholm to test whether the integration value can help explain rents. A statistically significant effect of integration value on both office and retail rent is found. It appears as if Space Syntax adds important information to the understanding of intraurban rent patterns.

Illiquidity is a main feature of most property markets and market participants are therefore directed to property appraisals to obtain information about market values. The reliability of property appraisals is therefore an important research topic. The third paper studies the “rationality” of valuations by testing if capitalisation (cap) rates from individual discounted cash-flow (DCF) valuations are consistent with economic theory. Standard econometrics is used to study the variation in cap rates. For the most part the results support the hypothesis that appraisers are “rational” in the above mentioned sense.

Illiquidity of direct property also poses a problem when constructing property price indices.  Lack of price observations and heterogeneity among the few observations available is likely to introduce noise in price indices based on transactions. Valuations are therefore often used instead to construct indices. These indices however suffer from a bias due to so called “appraisal smoothing”. In the fourth paper it is shown that, given certain assumptions, one may filter out noise in a transaction-based price index by regressing it on a valuation-based index (contemporaneous and lagged one period). The procedure may in some circumstances improve pure valuation- or transaction-based indices.

Place, publisher, year, edition, pages
Stockholm: KTH, 2010. 13 p.
Series
TRITA-FOB, 2010:4
Keyword
rent, space syntax, valuation, index, real estate, accessibility, capitalisation rate
National Category
Economics
Identifiers
urn:nbn:se:kth:diva-26801 (URN)978-91-978692-1-8 (ISBN)
Public defence
2010-12-20, D2, Lindstedtsv 5 Entreplan, KTH, 09:00 (English)
Opponent
Supervisors
Note
QC 20101201Available from: 2010-12-01 Created: 2010-11-29 Last updated: 2010-12-09Bibliographically approved

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