Cap rate is the headline metric for institutional real estate underwriting. It's the unlevered yield: NOI as a percentage of the all-in acquisition cost. Cap rate compression (rates getting lower) reflects more capital chasing the asset class; cap rate expansion (going higher) reflects investor caution.
For coliving, cap rate is meaningful but less universally applied than in traditional multifamily. Many coliving deals are master-leased rather than owned, which makes the asset/operator distinction critical. When operators report 'cap rate', clarify whether it's on the property or on the operator's lease.
Formula
Cap Rate = Annual NOI ÷ Property Purchase Price
Worked example: Property: €5M purchase price, €350,000 annual NOI. Cap rate = €350,000 ÷ €5M = 7.0%. If interest rates rise and the buyer pool now requires 8.5% cap rate, the same NOI valuation drops to €4.12M (~17% value haircut without operational change).
In the field
Lisbon coliving cap rates: 5.5–7.0% stabilized. London H16 schemes: 4.5–6.0%. Bangalore coliving: 9–13% (emerging-market premium). Cap rate compression in the asset class globally has been ~150bps since 2018 as institutional capital has scaled in.
Common pitfalls
- ×Quoting 'gross cap rate' (revenue-based) rather than NOI cap rate — meaningless for valuation.
- ×Comparing master-lease 'yields' against ownership cap rates — they're structurally different (one includes property risk, one doesn't).
- ×Underwriting at unrealistically low cap rates because that's what last year's comparable trades printed at.
- ×Using going-in cap rate without modelling exit cap rate expansion in the IRR.