This rate of return is normally adopted when income is a terminable income. To recoup (Get back) the capital invested in such type of property (Income would cease after some years), this rate of interest is adopted. This rate is called rate of recoupment or rate of redemption of capital. It is also called “Accumulative rate of interest”.
This is the rate of return expected by the investor for recoupment of capital invested in the property having terminable income. Such property are short term leases or buildings having short life span say less than 50 years. As income is terminable, capital invested in building or premium paid to acquire lease rights must be accumulated back within income termination period. This recoupment therefore requires highest and assured security with no risk whatsoever.
Rate of recoupment has to be therefore lowest possible minimum rate below which it is not likely to fall during entire period of accumulation of capital. Rate of recoupment for Sinking Fund for the building, is therefore adopted at the rate, as low as 3% to 3-1/2% vis-à-vis rate of capitalization of 8% to 9% (Remunerative rate) adopted for rental income from the building. It is thus obvious that interest rate adopted for recoupment should be always much lower than the remunerative rate of interest.
Some valuers are of view that only when terminable income is for short term (Period less than 50 years), net income is to be capitalised at duel rate (i.e. Remunerative rate on net income and Accumulation rate for recoupment of capital).
These valuers are of view that when terminable income is for long term (Period more than 50 years) net income has to be capitalised at single rate e. remunerative rate only. In their view for long term, remunerative rate and accumulative rate will be same.
Whereas some other group of valuers are of view that for all types of terminable income (For period more than 50 years also) duel rate should be adopted. Only for non-terminable income i.e. permanent income for 100 years or perpetuity, single rate has to be adopted. For rent controlled tenanted properties therefore single rate is adopted for capitalisation. Second view is more close to theoretical concept to provide for getting back of capital invested for terminable income.
