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A Study on Estimation of Market Capitalization Rates of the Office Building Market: Case of Seoul Metropolitan Area in Korea

Lee， Dongjoon 1,  Lee, Young-Man 1

1한성대학교

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ABSTRACT

The purpose of this study is to estimate the time-periodic constant-quality capitalization rates in the office building market. This study collects 396 cases of office building transaction in Seoul from the fourth quarter of 1999 to the fourth quarter of 2011, and then estimates the constant-quality capitalization rates using the hedonic price index model by quarter, half-year, and year. And it compares the constant-quality capitalization rates with the simple-mean capitalization rates. This study finds that the sum of estimation errors of the constant-quality capitalization rates estimated quarterly or semiannually is smaller than that of simple mean approach. This result shows that the quarter or semiannual simple-mean capitalization rates are less accurate than the quarter or semiannual constant-quality capitalization rates because of the sample-selection errors. However, in the annual model there is no distinct difference of the sum of the estimation errors between the hedonic price index model and the simple mean approach. In addition, this study finds that the sum of the estimation errors of the annual capitalization rates by the stratified mean approach, which divides Seoul area into two regions(Gangnam/ Yeouido region and CBD/ other region) and aggregates the simple-mean capitalization rates of the two regions, is smaller than that of the annual simple-mean capitalization rates.

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