Question

If the cap rate on a property is 8%, and you expect the property to appreciate at 3% per year, approximately what discount rate (e.g., the expected unleveraged total return) should be applied to determine the market value in a multi-year DCF analysis? Group of answer choices 9% 11% 7% 5%

Answer 1

when I am expecting that the property should be appreciating @ 3% where as the overall capitalisation rate is 8%,it would be wiser to adjust the capitalisation rate with the growth in the value of the property, so that an effective discounting rate should be adopted so I would be subtracting the growth rate from the capitalisation rate in order to arrive at adequate discounting rate.

this is such because lower discounting rate will help me to gain more value of the property and since the property value is showing growth, there should be overall increment in the value of property and that could be achieved through decreasing the growth rate from the capitalisation rate, as the discounting rate would be lower.

Discounting rate=[capitalisation rate-growth rate of the property]

= [8%-3%]

= 5%

Hence the correct answer is option (d) 5%