HISTORICAL CAP RATES
The most commonly used technique for estimating a resale price for an income-producing property is through the direct income capitalization approach, which divides the property's net
operating income with an expected exit cap rate. Historical cap rate data can help the analyst to establish a realistic range for such exit cap rates.
When reviewing
historical cap rate data the analyst needs to know how the provided figures
have been calculated. As it may be
known the traditional formula for the capitalization rate is: Capitalization
Rate = Net Operating Income (NOI)/Market Price (Value) Usually this
data can be obtained by specialized vendors that provide cap rates by market and property type. As such, they
represent averages of cap rates involving properties within each type and
market. In general, the historical cap rate data provided by vendors may fall under one of the
following four categories in terms of the inputs that are used to
calculate them: 1.
Both the numerator and denominator
of the formula are based on sales transaction data in the period for which the
data refers to. Thus the NOI figure in the numerator
is the actual NOI of properties transacted and the
market price in the denominator is the respective actual sales price of the
properties transacted. 2.
The sales price in the denominator
is the actual sales price of a property, but the NOI
in the numerator is not the actual NOI of the
property transacted but an estimate of the NOI that
the property would command given market rents and the characteristics and
location of the property 3.
The NOI
in the numerator is the actual NOI of the property
but the market price in the denominator is the appraised value of the property,
as the property has not been transacted during the period for which the cap
rate is estimated. Actually the cap rate data reported by the National Council
of Real Estate Investment Fiduciaries (NCREIF) fall
in this category.
4. Both the NOI
in the numerator and the price/value in the denominator represent estimates of NOI that a particular property would command and its market
price during the period for which the cap rate is reported.
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