Constructing a Market Based Capitalisation Rate

This abstract discusses the concept of market-based consistent capitalisation rate, which is used to value assets and project market returns. The authors argue that in order to gain insight into pricing, it is necessary to explore the theory behind determining a discount rate, also known as the capitalisation rate. The capitalisation rate is used to discount the cash flow to calculate property value. Market pricing can be obtained by observing the value of the capitalisation rate, which has two applications: pricing other assets and diagnosing the drivers of capital growth. However, the authors raise concerns about inconsistent assumptions in the cash flow and their impact on comparable yields across markets. They propose an alternative approach of calculating a consistent capitalisation rate based on minimal assumptions in the explicit part of the cash flow or the flow valued in-perpetuity, which can then be used to calculate the impact of changes in market pricing on capital value and make price comparisons across markets.