CAPM versus expert opinion: Do practitionersÕ perceptions meet theory? Evidence from the survey of Estonian commercial real estate market

According to finance theory, several methods (either direct or indirect) can be used to calculate investor’s required rate of return. In case of direct method, the value of required rate of return will be given by investors themselves, which depend heavily on investors’ levels of risk aversion. In case of indirect methods, the required rate of return is calculated using current or historic data. The major difficulty here is that actual required rate of return cannot be observed from market data and that is why scholars have to estimate different rates of return, using various techniques. One of the most well-known and widely used methods in theory and also in practice for estimating required rate of return of an investment is capital asset pricing model (CAPM).Although widely used, CAPM has still got a quite heavy criticism by several. Therefore, the authors of the paper have an intention to test the correctness of the estimation of long-term rates of return, calculated by CAPM on real estate market experts in Estonia. Real estate market has chosen as the test-market sector because of its explicit framework. Estonia as a test-country has been chosen because of the secondary intention to prove the applicability of CAPM also on smaller markets. The aim of the authors of the paper is to compare coherence between the expert opinion and the theoretical calculation of the most appropriate long-term rates of return for commercial real estate projects on the example of Estonian real estate market. Knowingly to the authors, there has been not done similar kind of survey so far, implying to the possible gap in the literature.The survey findings show that the results acquired through the questionnaire conducted among real estate appraisers, investors and consultants in Estonia verify the correctness of the result of required rate of return obtained by CAPM, based on long-term historic data. Based on both results, the average long-term required rate of return of a typical market participant, considering typical commercial real estate in Estonia, is rounded to 9%.