Capitalisation rate (taux de capitalisation)

The capitalisation rate is the figure that links a rent to a value. The Charte de l’expertise en évaluation immobilière (the French property valuation charter) defines it by a simple formula: capitalisation rate = annual income / market value net of purchase costs. Conversely, the value of a let property is obtained by dividing its income by the rate: premises producing €30,000 a year, in a market where investors accept 6 %, are worth €500,000 net of purchase costs.

The rate sums up, in a single number, all the market’s expectations about a property: its location, its quality, the strength of the tenant, the length of the lease, the level of charges, the perceived risk of the asset class and the prospects for rental growth. The higher the perceived risk, the higher the rate and the lower the value. The Charte specifies that it applies mainly to residential property and that it may be used with the actual income, the market rental value or a prudent and sustainable income for mortgage lending.

Where the rule comes from

Title III, chapter 8, § 8.1 of the Charte (6th edition, November 2025) gives the formula and the factors that determine it. § 2.2.3 describes perpetual capitalisation: an income assumed to be perpetual at market rent, with all future growth built into the rate, in an active and liquid market. § 8.5.1 lists among common errors the confusion between value net of purchase costs (capitalisation) and value including costs (yield), and the failure to justify rates by market references. The EVS 2025 deal with the capitalisation rate in their methodology section, § 7.

In a valuation report

I derive the rate from transactions in let buildings whose price and rent I know, specifying whether I relate the income to the value net of or including purchase costs, and whether it is the passing rent or the market rent. I then adjust the observed rate for the particular features of the property (shorter lease, weaker tenant, works to be expected) and explain each adjustment. The report presents the calculation, a range of rates and the sensitivity of the value to a change of 0.25 point.

Example

A building of four flats let at €34,800 a year, non-recoverable charges €3,800, net income €31,000. Three sales of comparable let buildings show 5.1 %, 5.4 % and 5.6 % on net income and value net of purchase costs. I adopt 5.4 %, giving a value net of costs of €574,000, rounded to €575,000. At 5.15 %, the value would be €602,000; at 5.65 %, €549,000: this sensitivity appears in the report.

Not to be confused with

The yield relates the income to the total capital invested, transfer duties and notarial fees included; it is therefore lower than the capitalisation rate for the same property. The discount rate is used to convert future flows into present value in a DCF.