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How are cap rates affected by interest rates

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Reference no: EM131734224

Problem: Starting with your answer to Question, write the investor's required return as the sum of the risk-free rate plus a risk premium to establish the approximate relationship between the cap rate, interest rate, risk premium and growth rate in property cash flow. Then answer the following questions:

a. How are cap rates affected by interest rates? Does an increase in the risk-free rate imply higher cap rates?

b. Many analysts have taken to defining the spread between the cap rate and the risk-free rate as a risk premium. What is wrong with this practice? Under what conditions does this lead to the perception of a high-risk premium being incorporated into property values, when in fact the opposite is true?

Question: What is the approximate relationship among the cap rate, the discount rate, and the long-run average growth rate in property cash flow and value?

Reference no: EM131734224

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