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Property yields as tools for valuation and analysis
Rosane Hungria-Garcia

in collaboration with Hans Lind Björn Karlsson

This report has been sponsored by the Real Estate Academy at the Division of Building and Real Estate Economics.

Stockholm 2004 ______________________________________________________
Report No. 52 Building & Real Estate Economics Department of Infrastructure KTH

This project was started in order to get an overview of conceptual problems, measurement problems, theories of determinants of yields, the use of yields in different contexts and how the actors on the Swedish market looked upon yields. Important issues discussed in the report is the need for: - Conceptual clarity: A number of different yield terms exist on the market and it is very important to be clear about how the specific terms are defined. - Operational clarity: There are measurement problems both concerning rental incomes, operating and maintenance costs and property values. This means that reported yields can be “manipulated” by choosing suitable operationalisations and pushing estimations of uncertain factors in directions that are favourable to the actor in question. - Specify the purpose for which the yield should be used. The most important distinction is between using yields/income returns for valuation purposes and using yields as benchmarks or bubble indicators. In the first case various types of normalization of the net operating income can be rational. In the second case it is important that the figure reflects “actual” incomes and costs, and that the concept is standardized and in such a way that the room for manipulation is small. - A clear view about how yields/income returns should develop according to different theories, e.g how the relate to the real return on other investments, inflation levels, risks and expectations about the development of…...

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