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