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Direct Capitalization versus Yield Capitalization for Real Estate Property Valuation

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  • Anamaria CIOBANU

Abstract

Even though it use a very simple formula, the market value estimation of a real estate property by using direct capitalisation method have to be based on a thorough analysis of factors considered in application of this method. The capitalisation rate observed on real estate market does not necessarily reflect the right level of the premium that should be considered to cover the risk took by the investors. The ratio between net operating income and the transaction price of a similar real estate property can be considered a good reference for the current level of capitalisation rate only when there have been a lot of similar transactions (min. 20-30) and investors are not speculators. From this perspective, this paper will present the important aspects that should be considered for a correct application of direct capitalisation method.

Suggested Citation

  • Anamaria CIOBANU, 2009. "Direct Capitalization versus Yield Capitalization for Real Estate Property Valuation," The Valuation Journal, The National Association of Authorized Romanian Valuers, vol. 4(1), pages 41-55.
    • Handle: RePEc:vaj:journl:v:4:y:2009:i:1:p:41-55
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods

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