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Paper eres2005_334:
Risk Premiums in Cap Rates of Investment Property

id eres2005_334
authors Tansens, Pol R.; M. Van Wouwe and Tom Berkhout
year 2005
title Risk Premiums in Cap Rates of Investment Property
source Book of Abstracts: 2005 European Real Estate Society conference in association with the International Real Estate Society
summary Our research wants to establish links and patterns over time between the constituent components of the cap rates, and between real interest and risk premium in particular. We developed a statistical model to predict and explain the risk premium asked for by investors buying properties throughout Europe, with the aim to having reliable risk premium forecasts in the years ahead. The research reveals that both an univariate and a multiple linear regression model appear to be significant (satisfactory) models, predicting the risk premium from one explanatory variable (the real interest rate) or from two explanatory variables (the nominal interest rate and inflation). Moreover, dummy variables were introduced to deepen the results and to highlight the sensitivity of the risk premium to the kind of properties asked for (offices or retail), and to the various geographical regions properties are located (Holland, Belgium, Frankfurt, London). A main conclusion is that the risk premium seems to be used by investors to ‘adjust' the initial yields at which they buy or sell properties. The risk premium appears to have a corrective effect, keeping the cap rates at a rather stable level. This is in contrast to the more common proposition that the risk premium would be a compensation for the increased level of risk of real property. Furthermore, risk premium may highly vary over time: from 0 to over 600 basis points, well below or above the "assumed" 200 basis points.
series ERES:conference
type normal paper
discussion No discussions. Post discussion ...
session Session G3
last changed 2008/11/01 09:47
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