The discount rate for property

Jaime Sabal Cárdenas

The discount rate for property

Jaime Sabal Cárdenas

Research output: Conference paper › Contribution

Abstract

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.

Original language	English
Publication status	Published - 22 Oct 2012
Event	XLIX Asamblea Anual CLADEA 2014 - Duration: 22 Oct 2012 → 4 Nov 2014

Conference

Conference	XLIX Asamblea Anual CLADEA 2014
Period	22/10/12 → 4/11/14

Cite this

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title = "The discount rate for property",

abstract = "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.",

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PY - 2012/10/22

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N2 - 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.

AB - 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.

M3 - Contribution

T2 - XLIX Asamblea Anual CLADEA 2014

Y2 - 22 October 2012 through 4 November 2014

ER -

The discount rate for property

Abstract

Conference

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Cite this