Capitalization Rates As Risk Indicators For (Non-)Efficient Properties?

Sustainability is at the forefront of recent management discussions. Climate changes, the fact that buildings are responsible for about 40% of the worldwide CO2-emissions and the increasing occupancy costs force investors and occupiers to change their management strategies and behaviors. But greening the portfolios might sometimes lead into converse directions and different benefits. All these biased perspectives of investors and occupiers interact in the valuation of the properties as efficient buildings should realize higher capital values as non-efficient buildings since efficiency reduces the property specific risk. Therefore the capitalization rate as all risk yield can be taken as indicator for the individual property to reflect the risks of being (non-)efficient. The aim of this paper is to analyze how current valuers account for the risk of non-efficient properties in the derivation of the adequate capitalization rate. By combining the investorsí and the occupiersí perspectives and taking all their relevant property costs on lease contract level into consideration this paper addresses the overall impacts of efficiency in the valuation process of the property market. Thereby, the crucial question will be addressed whether significant differences occur in the risk premiums of the capitalization rates for (non-)efficient properties. For this purpose, the relative risk premiums of 47 properties in the UK, based on data from the IPD Investment Property Databank as well as the IPD Occupier Databank, are each analyzed and measured against tailored IPD capitalization rate benchmarks of direct properties for the years 2007 and 2008. The results will give new insight into the definition of the right capitalization rate. The analysis shall help to explain risk patterns add to an improved understanding of the valuation and differentiation of (non-)efficient properties.