Global Cap Rates of Real Estate

Last week, we have discussed about the Cap Rates of Hong Kong Real Estate, and showed that the trends follow the US Treasury Yield Rate. In fact, it is not just Hong Kong that bears the relationship, but globally the US Treasury Yield Rate is commonly regarded as the riskless rate of return, the cap rates of many other investment vehicles would be affected by the US Treasury Yield.

For example, it has been found that the Cap Rate of all major real estate in the US come close to the US Treasury Yield Rate, and their difference, which is coined as the “Cap Rate Spread to the 10-year Treasury Yield”, is found to be fluctuating within a narrow band of below 400bp in average (Figures 1 and 2).

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Figure 1 Commercial Real Estate Cap Rate vs 10-year Treasury Yield Rate. Source: Hughes (2014)
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Figure 2 US Cap Rate Spread to 10-year US Treasury Yield of Major Real Estate. Source: Schnure (2018)

Interestingly, when the US housing price was skyrocketing from 2001 to 2006, the Cap Rate Spread was reducing to just about 100bp. Then after the bubble burst after the Global Financial Crisis, the Cap Rate Spread rebounds to about 400bp, as shown in Figure 2.

Geographically, Cap Rates of real estate in the same region would tend to move together, probably due to the strong correlations in risk premium and expected growth rates of income. For example, Figures 3 and 4 show the Cap Rates of office, retail and industrial in 3 continents, APAC, Americas, and Europe.

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Figure 3 Cap Rates of Office in 4 Geographical Regions. Source: Colliers (2012)

Figure 3 clearly shows the geographical groupings of Cap Rates of real estate, where the top 3 Cap Rates in Asia Pacific region were from 2.50% to 3.50%, that in Europe were from 3.50% to 4.00%, that in North America were from 4.70% to 4.90%, and that in Latin America were from 9.00% to 10.25%. They are probably reflecting the risk premium and the expected growth rates of the regions.

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Figure 3 Cap Rates of Real Estate in APAC, Americas, and Europe in Q3 2017. Source: Colliers (2018)

By real estate sector, Figure 4 shows that Industrial Sector’s Cap Rates are normally higher than Retail and Office, by about 1 to 2%. It may be due to the transition from manufacturing industry to services industry in the mega cities sampled in Figure 4.

Mathematically, the Cap Rate R of real estate can be affected by 3 factors, viz. (1) the risk-adjusted rate of return of other investment vehicles, r; (2) the expected growth rate of rental income, g; and (3) the risk premium required by the investors p, as shown by the following formula:

R = r-g+p


Colliers (2012) Global Office Markets Show Stability in the Face of Headwinds,

Colliers (2018) Global Cap Rate Report 3Q 2017,

Hughes, W.E. (2014) Interest Rates and Commercial Real Estate Investment Activity, Utah Property Investors, Dec 8.

Schnure, C. (2018) Property Prices and Cap Rates in a Rising Interest Rate Environment, Nareit Market Commentary,Mar 29.

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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