Which of the following statements is most accurate regarding real estate capitalization rates? A) If during periods of rising inflation, there is an increase in net operating income (NOI) and the growth rate of NOI, capitalization rates and value estimates will increase. B) Generally, as interest rates increase, capitalization rates increase and value estimates decline. C) As the difference between the required return on equity capital and the growth rate in NOI (g) increases, value estimates will also increase. D) As the growth in net operating income increases, capitalization rates and value estimates will decline.

My guess would be B. Using the build up method = rf + recap + liquidity + risk If interest rates go up, rf increases, increasing cap rate, decreasing value using the NOI/cap rate.

c

^^^ Wouldn’t that decrease the value? If the difference between r-g increases, you have a bigger number in the denominator which will decrease the MV.

I agree – decrease the value for C

When I first looked at it, I figured if everything grows with inflation, value would be the same. Now I am not so sure.

Here’s the answer- I fell for A also, but yeah, if cap rate increases, value should decrease. Nibs had it right- you’re en fuego today! this is a good q to see how all of the pieces work together i thought. Your answer: A was incorrect. The correct answer was B) Generally, as interest rates increase, capitalization rates increase and value estimates decline. MV = NOI/k - g = NOI/C Where: MV = estimated market value NOI = the net operating income from a real estate investment. k = the rate that equity investors require from a real estate investment. g = the growth rate of NOI (assumed to be constant). C = k – g = the market capitalization rate. From this relationship, we see that: as the growth rate of NOI increases, capitalization rates decline and value estimates will rise, the capitalization rate is the spread between k and g. Thus, as the spread widens, value estimates decline, and holding k constant, value is directly related to g. The effect of inflation on value estimates depends on its combined effect on the required return (k) and the growth rate (g). If the net result is to decrease (increase) the capitalization rate, value estimates will rise (fall).

B. cap rate = required rate of return - growth rate. If interest rate increase, the value will be less.

schweser exam 3 morning has some horrible real estate stuff…

definitely B - very similar to DDM Value = NOI/(r-g)

How does interest rate increase affect k and g?

My reasoning: if interest rates increase, you are going to require a higher return for the real estate investment so the r goes up, the cap rate goes up, and the value goes down

similar to DDM increase in RFR -> increase in k -> P goes down

Thanks!