Question

1. Cap rates vary considerably across the different property types/classes. Please explain in detail what is responsible for these differences. (i.e., what is driving the differences in cap rates across the different property types)

Answer 1

Ans:

Capitalization rate is the real estate price valuation measure used to compare different properties and different real estate investment.

Factors responsible for these differences are:

(i) Age, Location of property: If the property is very old than the cap rate will be different comapred to new property.

(ii) Type of property: For office use, Manufacturing, industrial, commercial, residential, etc.

(iii) Lease and rental receipts.

(iv) Market rate of property prevaling in the market.

(v) Term and structure of tanent's lease

(vi) Income status of buyer.

From the above table we can see that there is different percentage of cap rate. first, cap rate is 9%. secondly 11% and lastly 13% and the potential growth income remains same in all three situations.

Now we can arrive at conclude from the above that the value or price is more when cap rate is 9% as compared to the price when cap rate is 11% and 13%. Thus cap rate vary considerably across the different property types/classes.