Which of the following is NOT a variable involved in a stress test?

In the context of real estate finance, a stress test is a simulation used to determine how the performance of an investment would fare under adverse conditions. This typically includes assessing variables that can significantly affect the cash flow and overall financial health of a property investment.

Occupancy is a critical variable since it directly influences rental income. Low occupancy rates can dramatically decrease cash flow and make it hard to cover expenses.

CapEx overrun (Capital Expenditure overrun) is also important, as unexpected costs in managing and improving a property can erode profits, especially if the property is underperforming.

The exit cap rate, which reflects the expected market value of the property at the time of sale, is fundamental in assessing long-term investment returns. A higher exit cap rate generally indicates increased risk and can lead to lower sale proceeds.

Return on equity, however, is a metric that measures the profitability of an investment relative to shareholder equity but does not directly factor into modeling stress conditions. It reflects performance after the fact rather than modeling scenarios that could lead to stress. Therefore, it is not considered a variable in the context of conducting stress tests.