Development of a methodology of the capitalization rate in real estate appraisal

An accurate and justified valuation of assets plays an important role for successful investments in the real estate market. A significant influence on the final result of the market cost is provided by the capitalization rate which is used in the direct capitalization method and to determine the cost of reversion in the method of discounting cash flows. The article considers the hypothesis about the possibility of predicting the capitalization rate, which is important for reducing the uncertainty in making managerial decisions. The authors developed a model that allows to effectively predict the capitalization rate. We have verified the obtained model using the objects of office real estate of St. Petersburg using simulation modeling (the Monte Carlo method). Moreover, we compared the market capitalization rate of St. Petersburg and other major cities of the world. Next, we analyzed the influence of the chosen model technique for calculating the capitalization rate on the final result of the valuation with a review of the main advantages and disadvantages of such model techniques. In order to determine the validity of using model techniques for real estate appraisal we calculated the cost of a hypothetical office building on the basis of retrospective data of the St. Petersburg market in accordance with each model. The study presents a comparison of the obtained results with a real time series of the cost. In addition it provides an alternative model for calculating the value within the income approach to valuation, which gives more accurate results. The results of the study are the model for predicting the capitalization rate with a probability of 95% and recommendations for the effective use of model techniques for calculating the capitalization rate.