Transaction-Based and Appraisal-Based Capitalization Rate Determinants

Alain Chaney and Martin Hoesli
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Alain Chaney: Universitiy of Geneva

No 12-28, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper provides a contribution to the discussion on appraised values vs. transaction prices by comparing the driving factors of appraisal-based capitalization rates with those of transaction-based capitalization rates. Using a rich database of real estate transactions in Switzerland for the period 1985–2010, we identify several property-specific variables that have not been used in prior research and that increase the explained portion of the cap rate variance by as much as 10 percentage points. Results show that compared to investors, appraisers overweight factors that they can easily observe when they appraise a property, at the cost of variables related to growth expectations and the opportunity cost of capital. This has two implications. First, it helps to explain the appraisal-smoothing phenomenon, as the easily observable factors hardly change over time, while the latter variables do change frequently and significantly. Second, investors put less emphasis on factors that are diversifiable, which suggests that they have a portfolio perspective, whereas the focus of appraisers is more on the individual property level.

Keywords: Appraisal-Based Capitalization Rates; Transaction-Based Capitalization Rates; Real Estate Risk; Appraisal Smoothing; Valuation (search for similar items in EconPapers)
JEL-codes: G11 G12 R33 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-08
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (4)

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http://ssrn.com/abstract=2138908 (application/pdf)

Related works:
Journal Article: Transaction-Based and Appraisal-Based Capitalization Rate Determinants (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1228

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