Dagmar Vágnerová Linnertová Martin Cupal Wrofin 2022 http://wrofin.ue.wroc.pl

Determination of Cap Rate Using Financial Data from European REITs Market: The Case of the Czech Republic

In the Czech Republic the discount cash flow approach is widely used for real estate appraisals. This method is based on discounting the expected futures cash flows by a proper discount rate (capitalization or cap rate) and is also known as an income approach. In this case the yield is required minimal rate of return which is required from a real estate property investment on the annual basis. The yield should be based in the analysis of comparable transaction, but also the recent market situation must be taken into an account. Market situation can be summarized by what is a market and what is expected Shapiro et al. (2013). Valuation models of financial assets can also be applied to the valuation of real estate if certain specifics are respected. However, the valuation of real estate brings with it certain differences compared to the valuation of financial assets. The first difference is their heterogeneity of the subject of valuation and differences in individual characteristics such as size, condition, or location. The fact that real estate is locally bound also creates a problem in valuation based on past (implemented) transactions, which are only exceptionally locally identical to the valued real estate. Another significant difference between real estate and financial assets is liquidity, where financial assets can be sold in a matter of minutes. A significant difference is also the fact that the required minimum investment is significantly higher in the case of real estate.

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