The discount rate used in financial calculations is usually equal to the cost of capital. Risk considerations associated with uncertain cash flows and with other developments are included within the discount rate.
In another words, discount rate is the interest rate used to
calculate the present value of future cash flows. In other words,
the discount rate tells how much of the future value consists of
interest and how much of it is principal.
Variables affecting the discount rate:
- Economic conditions
- Inflation rate
- Rate of returns of comparable properties
- Rate of return for alternative investments.
- According to our investigations, the discount rates in Turkey vary between 9-18% for the projects.
A
capitalization rate (or "Cap Rate") is a measure of
the ratio between the net income produced by real estate and its
capital cost (the original price paid to own the asset). The rate is
calculated in a simple fashion as follows:
- Annual Net Income / Capital Cost = Capitalization Rate
For instance, if a building is purchased for $1,000,000 sale price
and it produces $100,000 in positive net cash flow (the amount left
over after fixed costs and variable costs is subtracted from gross
lease income) during one year, then:
- $100,000 / $1,000,000 = 0.10 = 10%
That asset's capitalization rate is 10% (ten percent).
Capitalization rates are a measure of how fast an investment will
pay for itself in net cash flows. In the example above, the
purchased building will be fully capitalized (pay for itself in net
income) after ten years.
In real estate investment, commercial buildings are often valued
according to project capitalization rates used as investment
criteria. This is done by algebraic manipulation of the formula
above:
- Capital Cost (asset price) = Annual Net Income / Capitalization Rate
In Europe, this is also called "Yield".
Variables affecting the capitalization rate:
- It varies from market to market
- It varies according to the different types of property
- It changes with economic conditions.
According to our investigations, we can say that the capitalization rates in Istanbul are around;
- 6-8% for the residential buildings
- 8-12% for the commercial buildings (warehouse, plant, office, stores, hotel and etc.)
- 7-9% for shopping centers
The indexation rate generally means feature of a
contract or agreement designed to adjust its value for general
price-level changes.
- For Turkish Lira payments - annual indexation based on cost of living index.
- For US $ payments - annual indexation usually 1 – 5 %.
The automatic adjustment of an economic variable, such as wages,
taxes, or pension benefits, to a cost-of-living index, so that the
variable rises or falls in accordance with the rate of inflation.
The inflation rate is the rate of increase in the
price of goods and services over a given period of time. The most
generally used measures of inflation are the Consumer Price Index
and
Producer Price Index.
The future stream of benefits and costs converted into equivalent
values today. This is done by assigning monetary values to benefits
and costs, discounting future benefits and costs using an
appropriate discount rate, and subtracting the sum total of
discounted costs from the sum total of discounted benefits.
IRR
is the discount rate which makes the net present value of revenue
flows equal to zero. The rate of interest (expressed as a
percentage) at which all-future cash flows (positive and negative)
must be discounted in order that the net present value of those cash
flows should be equal to zero. It is found by trial and error by
applying present values at different rates of interest in turn to
the net cash flow.
It is something called the discounted cash flow rate of return.
Management services for any multi tenant properties can be provided
by in-house or outsource. Management cost is generally
calculated as a percentage of actual gross income in financial
tables. It is periodic expense to keep the property in well
maintained and provide permanent cash flow.
Properties which management cost is used;
- Shopping centre
- Office
- Hotel
Management cost generally based on three expenses;
Fixed Cost;
is not affected from the occupancy of the property in general
meaning. This cost is paid by the owner of property for vacant
units.
Variable Cost; is a kind of management cost which changes with the occupancy level or the scope of provided service.
Renovation Cost; is for renovation of the building which must be renew within economic life of the building.
The Gini coefficient is a measure of inequality developed by the Italian statistician Corrado Gini
and published in his 1912 paper "Variabilità e mutabilità". It is usually used to measure income inequality, but can be used to measure any form of uneven
distribution. The Gini coefficient
is a number
between 0 and 1, where 0 corresponds with perfect equality (where
everyone has the same income) and 1 corresponds with perfect
inequality (where one person has all the income, and everyone else
has zero income). The Gini index is the Gini coefficient expressed
in percentage form, and is equal to the Gini coefficient multiplied by 100.
While the Gini coefficient is mostly used to measure income inequality, it can also be used to measure wealth
inequality. This use requires that no one has a negative net wealth.
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The Gini coefficient's main advantage is that it is a measure of
inequality, not a measure of average income or some other
variable which is unrepresentative of most of the population,
such as gross domestic product.
-
Gini coefficients can be used to compare income distributions
across different population sectors as well as countries, for
example the Gini coefficient for urban areas differs to that of
rural areas in many countries (though the United States' urban
and rural Gini coefficients are nearly identical).
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The Gini coefficient is sufficiently simple that it can be
compared across countries and be easily interpreted. GDP
statistics are often criticized as they do not represent changes
for the whole population, the Gini coefficient demonstrates how
income has changed for poor and rich. If the Gini coefficient is
rising as well as GDP, poverty may not be improving for the vast
majority of the population.
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The Gini coefficient can be used to indicate how the
distribution of income has changed within a country over a
period of time, thus it is possible to see if inequality is
increasing or decreasing.
An opinion of the best price at which the sale of an interest in
property would have been completed unconditionally for cash
consideration on the date of valuation, assuming:
- a willing seller;
- that, prior to the date of valuation, there has been a
reasonable period (having regard to the nature of the property
and the state of the market) for the proper marketing of the
interest, for the agreement of the price and terms and for the
completion of the sale;
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that the state of the market, level of values and other
circumstances were, on any earlier assumed date of exchange of
contracts, the same as on the date of valuation;
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that no account is taken of any additional bid by a prospective
purchaser with a special interest; and
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that both parties to the transaction had acted knowledgeably,
prudently and without compulsion.