Capitalisation rate
Net operating income as a proportion of a property's value, used in reverse to turn a year's stabilised income into a valuation. Small changes in it move the answer a great deal.
Where you will meet it
Capitalisation rate appears in 10 learning outcomes on the CFA syllabus. A few of them:
- Outline the main methods for valuing real estate
“The income approach capitalises expected net operating income, either by dividing a stabilised figure by a capitalisation rate or by discounting a forecast cash flow stream.”
- Value a private firm using methods based on income
“The capitalisation rate is the discount rate minus growth, and it is applied to next year's cash flow.”
- Set out the economic drivers of investment in commercial property
“A simple valuation is net operating income divided by a capitalisation rate, and the cap rate moves with real rates, expected rent growth and a risk premium for illiquidity and cyclical exposure.”
- Explain what drives the economic value of real estate investments and the part they play in a portfolio
“Interest rates and required returns set capitalisation rates, so rising rates can lower values even while rents rise.”
See also
Practise it
Practise capitalisation rate until it is automatic: questions that explain every wrong option.
Take the free diagnostic →