Risk Premium

Risk premium is the additional return demanded by investors above the risk-free rate to compensate for bearing investment uncertainty and volatility.

Premium ComponentTypical Range
Risk-free rateUS Treasury or UAE government bonds (3% to 5%)
Real estate premiumPlus 2% to 4%
Location premiumPlus 0.5% to 2% for secondary markets
Property type premiumPlus 1% to 3% for specialized assets
Leverage premiumPlus 0.5% to 2% for higher LTV
Total required returnSum of all components
Risk-Return RelationshipInvestment Type
Lower risk, lower returnCore prime properties, 6% to 8%
Moderate risk, moderate returnValue-add, 10% to 14%
Higher risk, higher returnDevelopment, 15% to 25%+


Related Terms

Required ReturnInternal Rate of Return (IRR)Risk Analysis Cap Rate

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