Will AI be able to determine Cap Rate?

Author: Steve Surridge

If Cap Rates are determined by assessing prior transactions and using data to get a view on a potential asset, will AI and machine learning be able to run analytics across volumes of data to form a view of what the Cap Rate should be?

At Forbury we understand that Cap Rates are just one variable. You've also got to take into consideration the market rent and what constitutes a market rent, and you’ve also got to consider your leasing assumptions, and whether they make a great tenant.

While you can have machine learning for some components of the valuation process, we believe you still need people to review the asset and assumptions. For example, if you've got an office floor, and one part of the office floor is looking out over the Harbour Bridge and the Opera House, and then the other part of the office building suite is looking at a concrete brick wall, then you would say that the market rent for the office facing the brick wall should be at a lower rate than the one that’s looking over the Sydney Harbour. When it comes to assessing market rent, the valuer goes through each suite or each level of the building when required to make assumptions, and this can be hard for a machine to learn.

WHat about automatic valuation models?

In the residential space, we see that banks can lend on e-valuations that are driven by AI or automatic valuation models (AVM). We’re finding that the ratio is about 50:50 AVM vs physical curbside inspections in the residential space in Australia right now.

Another big thing to consider is risk. The due diligence for residential property can be three days or less, meanwhile, due diligence on a sizeable commercial building can take three months as there are so many more variables to work through. The acquisitions could also be hundreds of millions, and you could be representing a number of investors, so the stakes are higher.

Could we have AVMs at the commercial end of town? While there are many more variables that go into the valuation of commercial real estate compared to residential, we believe there may be potential in the future for AI to enter the lower end of the commercial property industry.

ABOUT FORBURY

Over the years, more features and functionality have progressively been added into Forbury's software. We are continuously thinking of better ways to leverage our property valuation tech for the benefit of our customers. Property professionals using Forbury gain increased accuracy and speed, empowering them to cover more of the market without additional resources and expense.

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About the Author: Steve Surridge is the Founder of Forbury, and his ideas are inspired by an intrinsic desire to make sense of complexity. Follow him on LinkedIn