Capitalization Rates in Thailand

The capitalization rate, or cap rate, is used in the world of commercial real estate to indicate the rate of return that is expected from a real estate investment. Usually, it is computed by using the net operating income (NOI) of property divided by property asset value and is expressed as a percentage. It is used to estimate the investor’s potential return on their investment in the real estate market.

What is the cap rate in Thailand?

So, what should the cap rate be if you invest in Thailand?  In 2020, cap rates in Thailand were between 5%-8% depending on various factors, e.g., business sector, building grade, location. The number is derived from the analysis of the rate of return of Thailand Real Estate Investment Trusts (REITs), e.g., SPF, TIF1, TFUND, QHPF, MNIT, CPNREIT, etc.

Cap rates in Thailand have seen a gradual drop over time according to the high competition of the market, low interest rates, and higher cost of investment from land price increases.

Where is the cap rate in Thailand heading?

Cap rates in Thailand will mostly remain stable, but could see a slight decrease. A constant flow of new building supply results in rents remaining flat while land prices continue to increase.

Increasing the value of income property using the cap rate

The cap rate is calculated in a fraction using NOI as the numerator and asset value as the denominator. Asset value thus equals NOI divided by the cap rate. The higher the NOI, the higher the asset value. The two inputs to NOI are net revenue and expenses. Thus to increase the value of income property, one of two things need to be happening, ideally both simultaneously: 1) Net revenue needs to increase and/or, 2) Expenses as a share of net revenue need to decrease.