Exit cap rates
Why do we add incremental bps p.a. to the entry cap rate to get to the exit cap rate? Is it just a good/prudent underwriting practice, or there's strong business/commercial/market rationale behind it?
In particular against the macro backdrop of low interests that are expected to continue for the foreseeable future, and increasing capital allocation to the real assets/real estate that are expected to keep the market cap rates low if not compress further.
It's based on the fact that the building will be older and thus probabilisticly more functionally obsolescent, less desired than newer built properties over that time frame (10 years generally). Also, accounts for some deferred maintenance, physical deterioration that is somewhat normal as it would be too costly to maintain at the level to prevent it.
The second reason is just general conservatism. In reality, with interest rates as low as they are now, one could argue there should be extra hedge built in, but they could stay low for a decade or more (like Japan). But in general, interest rate guesses are not part of why exit cap rates are bumped higher in proformas.
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