The purpose of this paper is to present a methodology based on the transactional asset pricing approach (TAPA) and to illustrate the application of TAPA within the context of professional property valuation.
The TAPA is a novel analytical valuation methodology recasting the traditional derivations of the income approach techniques, including DCF, from a transactional perspective based on the principle of inter-temporal transactional equity, instead of the conventional investor-specific view originating from I. Fisher (1907, 1930).
The authors present DCF analysis as a specific case of a more general TAPA approach to valuation under the income method. This also leads to novel analytical derivations of the Direct income capitalization, Gordon, Inwood, Hoskold and Ring models. Based on the TAPA framework, the authors also research the value-enhancing effects of benchmark market volatility on the subject property value and conclude that such effects can be statistically significant depending on the DCF analysis period.
The research has a direct bearing on time-variable discount rate forecasting capabilities, as it uses a time-variant structure for the discount rates.
Using the US Case-Shiller and BLS rental indices as a valuation benchmark, the paper contains an example of applying the general TAPA framework to value a notional property under a TAPA’s DCF version. Such property valuations can be easily replicated in practice – especially in the context of equitable/fair value determination under the International Valuation Standards Council valuation standards.
TAPA is a deductive principles-based theory of asset valuation especially fit for the transactional and illiquid asset valuation contexts – thus enabling a more efficient pricing for such assets in a sense of reflecting the transactional interests of the parties more closely than achievable under the conventional valuation methods.
TAPA is an original filiation of research with roots going as far back as Aristotelian Catallactics. It contains analytical formalizations of certain transactional equity principles.
The work was performed under the sponsorship of the RNF Grant 18-18-00488 “Research into opportunities for long-term forecasting of economic and technological development under the conditions of technological shifts and crises”. The authors are also grateful to JSC “The International Valuation centre” and Igor Artemenkov for supporting this research.
Michaletz, V. and Artemenkov, A.I. (2019), "The transactional asset pricing approach: Its general framework and applications for property markets", Journal of Property Investment & Finance, Vol. 37 No. 3, pp. 255-288. https://doi.org/10.1108/JPIF-10-2018-0078
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