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The valuation of upwards‐ only rent reviews: an option pricing model

Charles Ward (Department of Land Management and Development, The University of Reading, Whiteknights, Reading, UK)
Nick French (Department of Land Management and Development, The University of Reading, Whiteknights, Reading, UK)

Journal of Property Valuation and Investment

ISSN: 0960-2712

Article publication date: 1 May 1997

Abstract

The upwards‐only rent review is a characteristic feature of the institutional property lease in the UK. It has been subject to increased attention by investors and regulators in the 1990s with various proposals which sought to make upwards‐only rent reviews illegal. Applies an arbitrage method based on market pricing which enables consistent valuations of different investment opportunities to be compared in a rigorous yet consistent approach. In this way the value of the upwards‐only option can be assessed. Uses the arbitrage approach to value the difference between a lease in which the rents are reviewed upwards‐only and that in which rents can be reviewed upwards or downwards. Starts by applying the arbitrage approach to a simple lease in which rent may take only two values. This simple approach is well established in the finance literature when analysing options, and the valuation of the upwards‐only lease may be seen as a multi‐option contract.

Keywords

Citation

Ward, C. and French, N. (1997), "The valuation of upwards‐ only rent reviews: an option pricing model", Journal of Property Valuation and Investment, Vol. 15 No. 2, pp. 171-182. https://doi.org/10.1108/14635789710166376

Publisher

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MCB UP Ltd

Copyright © 1997, MCB UP Limited