The discount rate for property

The CAPM is not a suitable model for real estate valuation. Practitioners get around this by discounting income property free-cash flows at a yield-implied discount rate. However, this is wrong because it ignores that the risk implicit in non-income cash flows, such as operating expenses, maintenance and rehabilitation, are considerably lower. A method for estimating an 'equilibrium discount rate' that accounts for the specific risk of each cash flow stream is proposed. Following a similar procedure, this equilibrium rate is then used to estimate a discount rate for development projects.