Cap rate

A cap rate is simply NOI over value, so a 5% cap rate is the same statement as 20 times NOI. It is the standard way real estate is priced, and converting it into a multiple makes it immediately comparable to the rest of finance.

Because it is an inverted multiple, small movements matter enormously. One point of cap rate at these levels costs roughly a sixth of the value, with the same tenants paying the same rent.

It varies with asset quality, location, lease length and tenant credit. A prime office let to a government tenant on a twenty year lease trades at a much lower cap rate, meaning a higher price, than a secondary industrial unit with a short lease.

It moves with interest rates, which is why real estate is the sector where the rate discussion is least abstract: a rise in the risk free rate feeds almost directly into the yield investors demand and therefore into value.