2014•Unpublished venueRequires access
Cost of Capital of Real Estate Entities
Thomas W. Hamilton
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Abstract
This chapter discusses the development and application of the cost of capital for real estate entities that own real property interests to produce income. It focuses on real estate business enterprises that derive a large percentage of their income from tangible, real property interests, such as equity real estate investment trusts (REITs), partnerships, and real estate operating and/or investment companies. The chapter concentrates on REITs, which represent a large portion of the real estate market for which public information is available and can be analyzed. Real estate entities collect rental revenues as the primary source of net operating income. Therefore, the real estate assets and revenue are connected to the local real estate market similar to direct real estate investments. Real property is frequently analyzed using a 10-year discounted cash flow (DCF) analysis. The 10-year bond approximates the risk-free investment of a similar investment period.