Cap rates and risk: a spatial analysis of commercial real estate
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Publication Date
2018-03-05Journal Title
Studies in Economics and Finance
ISSN
1086-7376
Publisher
Emerald Publishing
Volume
35
Issue
1
Pages
25-43
Type
Article
Metadata
Show full item recordCitation
Unbehaun, F., & Fuerst, F. (2018). Cap rates and risk: a spatial analysis of commercial real estate. Studies in Economics and Finance, 35 (1), 25-43. https://doi.org/10.1108/SEF-11-2016-0267
Abstract
PURPOSE: This study aims to assess the impact of location on capitalization rates and risk premia. DESIGN/METHODOLOGY/APPROACH: Using a transaction-based data series for the five largest office markets in Germany from 2005 to 2015, regression analysis is performed to account for a large set of asset-level drivers such as location, age and size and time-varying macro-level drivers. FINDINGS: Location is found to be a key determinant of cap rates and risk premia. CBD locations are found to attract lower cap rates and lower risk premia in three of the five largest markets in Germany. Interestingly, this effect is not found in the non-CBD locations of these markets, suggesting that the lower perceived risk associated with these large markets is restricted to a relatively small area within these markets that are reputed to be safe investments. RESEARCH LIMITATIONS/IMPLICATIONS: The findings imply that investors view properties in peripheral urban locations as imperfect substitutes for CBD properties. Further analysis also shows that these risk premia are not uniformly applied across real estate asset types. The CBD risk effect is particularly pronounced for office and retail assets, apparently considered “prime” investments within the central locations. ORIGINALITY/VALUE: This is one of the first empirical studies of the risk implications of peripheral commercial real estate locations. It is also one of the first large-scale cap rate analyses of the German commercial real estate market. The results demonstrate that risk perceptions of investors have a distinct spatial dimension.
Keywords
investment risk, commercial real estate, capitalization rates, real estate finance
Identifiers
External DOI: https://doi.org/10.1108/SEF-11-2016-0267
This record's URL: https://www.repository.cam.ac.uk/handle/1810/283348
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