CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
Which factor would most likely cause the value of a leveraged real estate investment to fall when interest rates rise?
Higher cap rates and higher financing costs most likely reduce value when rates rise. A higher cap rate lowers the value of a given NOI, and leveraged owners pay more interest, reducing cash flow. Lower vacancy would instead support value.
- ALower tenant demand for space in all sectors
- BHigher cap rates and higher financing costsCorrect
- CA decrease in the property's vacancy rate
Explanation
Rising rates tend to increase required returns and cap rates, lowering values for a given NOI, and raise borrowing costs on leveraged positions. Lower vacancy would raise NOI, supporting value. Tenant demand does not necessarily fall in all sectors.
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