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Article

Noel D. Uri and Paul R. Zimmerman

In 1999 the Federal Communications Commission adopted an order granting complete deregulation of the rates for special access service for specific metropolitan statistical…

Abstract

In 1999 the Federal Communications Commission adopted an order granting complete deregulation of the rates for special access service for specific metropolitan statistical areas based on an objective showing that there was potential competition in that market. This was done in an environment where the local exchange carriers (LECs) subject to price caps were earning a rate of return in excess of 22 percent, with the rate of return on an upward trend. By 2002, the average rate of return across all price cap LECs topped 35 percent. The question that is investigated in this paper is whether the price cap LECs have market power in supplying special access service and whether they have taken advantage of this. The data clearly show that this is the case. Given the prevailing situation, there is a clear need to revisit the pricing flexibility order. First, the product market for special access service needs to be more carefully examined. Second, the metrics used to define the potential for competition need to be revamped.

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Article

Denis Camilleri

The purpose of this paper is to establish whether a terminal value is a substantial amount of the final figure in a hotel’s valuation. Malta’s scenario has been delved…

Abstract

Purpose

The purpose of this paper is to establish whether a terminal value is a substantial amount of the final figure in a hotel’s valuation. Malta’s scenario has been delved into. This due to the fact that owing to Malta’s high population density and its restrictive land area, land values attract a high premium as compared with larger developed countries. Other matters such as earnings’ multipliers derived from a cap rate (initial yield), CAPEX has also been delved into.

Design/methodology/approach

The methodologies adopted in hotel valuation practice has been delved into. An extensive literature review is undertaken to analyse the earnings multiplier adopted by various authors over the past 30-year period. The hotel cap rate (initial yield) has been compared with similar yields adopted in the institutional and property markets and then compares to market-based data. A discussion is undertaken on the validity of adopting discounted cash flow, as against the short cut market appraisal approach. Capitalization rates, cap rates have also been referred to as obtained from the academic and practitioners field and compared. Depreciation and the anticipated annual accommodation charges have been analysed. A database of hotel rooms value over the past 20-year period has been referred.

Findings

A table outlines the earnings’ multipliers in perpetuity or for the limited expected design life for various cap rates. This data will act as a guide in guiding practitioners to establish an earnings’ multiplier to be applied in their valuation methodology. An example in the Appendix clarifies the manner in which this data table is to be utilized. The finding of this example notes that for this hotel in Malta, as constructed on private land, the terminal value for this development hovers around the 30 per cent of the market value.

Research limitations/implications

This analysis is based on five valuations as undertaken on five hotels in Malta with classification grades varying from III to V. This notes that the terminal value varies within a range of 9-45 per cent of the total value. This analysis has to be undertaken for other countries for a global range of land terminal values percentages to be established.

Practical implications

Establishing the terminal value of a hotel business, will offer greater security for secured lending facilities required. It will further act as an important tool to establish the feasibility of a hotel development.

Originality/value

Updated insight is given to existing hotel valuation methodologies by delving into the workings of the earnings’ multiplier and establishes that in today’s market the terminal value of the hotel basis has to be accounted for. The above findings are based on a link between theory and practice.

Details

Journal of Property Investment & Finance, vol. 33 no. 3
Type: Research Article
ISSN: 1463-578X

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Article

Florian Unbehaun and Franz Fuerst

This study aims to assess the impact of location on capitalization rates and risk premia.

Abstract

Purpose

This study aims to assess the impact of location on capitalization rates and risk premia.

Design/methodology/approach

Using a transaction-based data series for the five largest office markets in Germany from 2005 to 2015, regression analysis is performed to account for a large set of asset-level drivers such as location, age and size and time-varying macro-level drivers.

Findings

Location is found to be a key determinant of cap rates and risk premia. CBD locations are found to attract lower cap rates and lower risk premia in three of the five largest markets in Germany. Interestingly, this effect is not found in the non-CBD locations of these markets, suggesting that the lower perceived risk associated with these large markets is restricted to a relatively small area within these markets that are reputed to be safe investments.

Research limitations/implications

The findings imply that investors view properties in peripheral urban locations as imperfect substitutes for CBD properties. Further analysis also shows that these risk premia are not uniformly applied across real estate asset types. The CBD risk effect is particularly pronounced for office and retail assets, apparently considered “prime” investments within the central locations.

Originality/value

This is one of the first empirical studies of the risk implications of peripheral commercial real estate locations. It is also one of the first large-scale cap rate analyses of the German commercial real estate market. The results demonstrate that risk perceptions of investors have a distinct spatial dimension.

Details

Studies in Economics and Finance, vol. 35 no. 1
Type: Research Article
ISSN: 1086-7376

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Article

Tien Foo Sing

Option to review land rents to prevailing market rents and option to renew leases for another term are two important options embedded in the public industrial land leases…

Abstract

Option to review land rents to prevailing market rents and option to renew leases for another term are two important options embedded in the public industrial land leases in Singapore, managed by the Jurong Town Corporation (JTC). The land rents of JTC leases are reviewed every year subject to a cap on the land rent increase. The rent cap, which is historically lower than the prevailing market growth rate, widens the gap between the contract rent and the prevailing market rent as the lease progresses. This creates disincentives to the lessor for not exercising the rent review option, because the option is in‐the‐money. The rent gap, on the other hand, is also translated into substantial profit rents for lessees who hold onto the leasehold interests of industrial lands. By assuming two different probability distributions for the ex‐ante prevailing market rents, the profit rents were simulated to derive at the values of a hypothetical 30‐year lease, which range from US$47.93 (S$86.45) per square meter (psm) (Sungei Kadut, Kranji) to US$236.05 (S$425.74) psm (West Coast Highway). Based on these simulated 30‐year leasehold values and assumptions of other input parameters: equated yield (e = 10 percent), risk free rate (Rf = 4.52), volatility of leasehold value (σ = 15 percent), term of lease (T = 30 years) and rental growth cap (g = 7.6 percent), the premiums for the lease renewal options were estimated to be in a range of US$4.55 (S$8.21) psm to US$22.26 (S$40.15) psm.

Details

Journal of Property Investment & Finance, vol. 20 no. 3
Type: Research Article
ISSN: 1463-578X

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Article

Nabil Tahani and Xiaofei Li

The purpose of this paper is to derive semi‐closed‐form solutions to a wide variety of interest rate derivatives prices under stochastic volatility in affine‐term structure models.

Abstract

Purpose

The purpose of this paper is to derive semi‐closed‐form solutions to a wide variety of interest rate derivatives prices under stochastic volatility in affine‐term structure models.

Design/methodology/approach

The paper first derives the Frobenius series solution to the cross‐moment generating function, and then inverts the related characteristic function using the Gauss‐Laguerre quadrature rule for the corresponding cumulative probabilities.

Findings

This paper values options on discount bonds, coupon bond options, swaptions, interest rate caps, floors, and collars, etc. The valuation approach suggested in this paper is found to be both accurate and fast and the approach compares favorably with some alternative methods in the literature.

Research limitations/implications

Future research could extend the approach adopted in this paper to some non‐affine‐term structure models such as quadratic models.

Practical implications

The valuation approach in this study can be used to price mortgage‐backed securities, asset‐backed securities and credit default swaps. The approach can also be used to value derivatives on other assets such as commodities. Finally, the approach in this paper is useful for the risk management of fixed‐income portfolios.

Originality/value

This paper utilizes a new approach to value many of the most commonly traded interest rate derivatives in a stochastic volatility framework.

Details

Managerial Finance, vol. 37 no. 1
Type: Research Article
ISSN: 0307-4358

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Article

Steven Laposa and Andrew Mueller

The purpose of this paper is twofold: the authors initially survey a sample of literature published after the Great Recession that address macroeconomic and commercial…

Abstract

Purpose

The purpose of this paper is twofold: the authors initially survey a sample of literature published after the Great Recession that address macroeconomic and commercial real estate forecasting methods related to the Great Recession and compare significant lessons learned, or lack thereof. The authors then seek to identify new models to improve the predictability of commercial real estate early warning signals regarding cyclical turning points which result in negative appreciation rates.

Design/methodology/approach

The authors develop a probit model to estimate quarterly probabilities of negative office appreciation returns using an alternative methodology to Tsolaco et al. (2014). The authors’ alternative method incorporates generally publicly available macroeconomic and real estate variables such as gross domestic product, office-related employment sectors, cap rate spreads, and commercial mortgage flow of funds into a probit model in order to estimate the probability of future quarterly negative office appreciation rates.

Findings

The authors’ models demonstrate the predictive power of macroeconomic variables typically associated with office demand. The probit model specification shows probabilities of negative office appreciations rates greater than 50 percent either as the quarterly office returns become negative, or in some cases several quarters before office returns become negative, for both the Great Recession and the recession occurring in the early 1990s. The models fail to show probabilities greater than 50 percent of negative office returns until after they occur for the recession in 2001. While this indicates need for further improvement in early warning models, the models do predict the more severe periods of negative office returns in advance, indicating the findings useful to real estate investors to monitor the changes in economic and real estate data identified as statistically significant in the results.

Practical implications

The Great Recession is a unique laboratory of significant contractions, recessions, and recoveries that challenge pre-recessionary real estate cycle models. The models provide guidance on which historical economic indicators are important to track, and gives a framework with which to calculate the probability that office prices are likely to decline. Because the models use macroeconomic indicators that are publicly available from at least one quarter in the past, the models or variations of them may provide real estate professionals with some indication of an impending decrease in office prices, even if that indication comes only one quarter in advance. Armed with this information, property owners, investors, and brokers can make more informed decisions on whether to buy or sell, and how sensitive their real estate transactions may be to timing.

Originality/value

The authors introduce several new models that examine the ability of historical macroeconomic indicators to provide early warning signals and identify turning points in real estate valuations, specifically negative office appreciation rates caused by the Great Recession. Using data from at least one quarter in the past, all the data in the models are publicly available (excluding National Council of Real Estate Investment Fiduciaries data) at the observed return quarter being predicted, which gives practitioners rational insights that can provide at least one source of guidance about the likelihood of an impending decrease in office prices.

Details

Journal of Property Investment & Finance, vol. 35 no. 3
Type: Research Article
ISSN: 1463-578X

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Article

Colin Jones, Neil Dunse and Kevin Cutsforth

The purpose of this paper is to analyse the gap between government bonds (index-linked and long-dated) and real estate yields/capitalization rates over time for the UK…

Abstract

Purpose

The purpose of this paper is to analyse the gap between government bonds (index-linked and long-dated) and real estate yields/capitalization rates over time for the UK, Australia and the USA. The global financial crisis was a sharp shock to real estate markets, and while interest rates and government bond yields fell in response around the world, real estate yields (cap rates) have risen.

Design/methodology/approach

The absolute yield gap levels and their variation over time in the different countries are compared and linked to the theoretical reasons for the yield gap and, in particular, a changing real estate risk premium. Within this context, it assesses whether there have been structural breaks in long-term relationships during booms and busts based on autoregressive conditionally heteroscedastic (ARCH) models. Finally, the paper provides further insights by constructing statistical models of index-linked and long-dated yield gaps.

Findings

The relationships between bond and property yields go through a traumatic time around the period of the global financial crisis. These changes are sufficiently strong to be statistically defined as “structural breaks” in the time series. The sudden switch in the yield gaps may have stimulated a greater appreciation of structural change in the property market.

Research limitations/implications

The research focuses on the most transparent real estate markets in the world, but other countries with less developed markets may respond differently.

Practical implications

The practical implications relate to how to value real estate yields relative to interest rates.

Originality/value

This is the first paper that has compared international yield gaps over time and examined the role of the gap between index-linked government bonds and real estate yields.

Details

Journal of European Real Estate Research, vol. 8 no. 2
Type: Research Article
ISSN: 1753-9269

Keywords

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Article

Edward J. Schuck

Suggests that a form of modified variable rate mortgage (VRM) should bethe type of mortgage that is most attractive to the majority ofowner‐occupiers in New Zealand. VRMs…

Abstract

Suggests that a form of modified variable rate mortgage (VRM) should be the type of mortgage that is most attractive to the majority of owner‐occupiers in New Zealand. VRMs are shown to be lenders′ choice of mortgage because their traditional reliance on retail deposits and other forms of short‐term finance necessitates that their assets be of similar duration. In exchange for unilateral rate‐setting powers, lenders compensate borrowers (to a degree) with relatively low administration costs. Though it appears that the range of mortgage products available in New Zealand is now too narrow, this is beginning to be rectified by new products that offer more conservative borrowers the ability to reduce risk. Finally, analysis of historic mortgage margins indicates that there are differences between lenders. Solely on the basis of rate‐setting practice, though no lender appears to have been able to charge significantly higher margins than all of the other lenders, one institution has offered significantly lower margins.

Details

Journal of Property Finance, vol. 5 no. 1
Type: Research Article
ISSN: 0958-868X

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Article

Hugh F. Kelly

The purpose of this paper is to develop benchmarking standards for risk premiums in capitalization rates and commercial mortgage rates, to examine the impact of investor…

Abstract

Purpose

The purpose of this paper is to develop benchmarking standards for risk premiums in capitalization rates and commercial mortgage rates, to examine the impact of investor choice of property type and geographic markets on those risk premiums, and to supplement the quantitative analysis with historical and behavioral decision-making factors.

Design/methodology/approach

Using data sets extending from 1Q 1995 to 2Q 2016, a range of risk premiums is calculated and norms established at the 65th and 35th percentiles by property type and investment position. Relative levels of the risk premiums are compared to three defined categories of urban markets, to discover potential risks in yield-seeking market selection. A historical context is discussed to illustrate that prudential judgment is needed to supplement statistical measures of risk.

Findings

A stable range of risk premiums is identified for the pre-financial crisis period 1995-2003, the dislocations of risk pricing 2004-2007 leads to an extreme reaction 2009-2012. A period of “renormalization” is hypothesized thereafter. An important distinction is made between the transaction peak of 2007, and the numerically similar peak of 2015. Taxonomy of urban property markets is adduced.

Practical implications

Investment analyses and portfolio allocation decisions can benefit from a longitudinal examination of risk premiums hitherto unavailable. The proposed taxonomy of markets has been shown (elsewhere) to correlate to investment performance. City planners may wish to capture increased real estate value stemming from investor preferences among cities.

Originality/value

The risk premium benchmarking is not previously available in the scholarly literature. The historical context as a prudential element in evaluating risk is not often emphasized in the finance literature.

Details

Journal of Property Investment & Finance, vol. 35 no. 6
Type: Research Article
ISSN: 1463-578X

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Article

Mason Gaffney

A tax based on land value is in many ways ideal, but many economists dismiss it by assuming it could not raise enough revenue. Standard sources of data omit much of the…

Abstract

Purpose

A tax based on land value is in many ways ideal, but many economists dismiss it by assuming it could not raise enough revenue. Standard sources of data omit much of the potential tax base, and undervalue what they do measure. The purpose of this paper is to present more comprehensive and accurate measures of land rents and values, and several modes of raising revenues from them besides the conventional property tax.

Design/methodology/approach

The paper identifies 16 elements of land's taxable capacity that received authorities either trivialize or omit. These 16 elements come in four groups.

Findings

In Group A, Elements 1‐4 correct for the downward bias in standard sources. In Group B, Elements 5‐10 broaden the concepts of land and rent beyond the conventional narrow perception, while Elements 11‐12 estimate rents to be gained by abating other kinds of taxes. In Group C, Elements 13‐14 explain how using the land tax, since it has no excess burden, uncaps feasible tax rates. In Group D, Elements 15‐16 define some moot possibilities that may warrant further exploration.

Originality/value

This paper shows how previous estimates of rent and land values have been narrowly limited to a fraction of the whole, thus giving a false impression that the tax capacity is low. The paper adds 14 elements to the traditional narrow “single tax” base, plus two moot elements advanced for future consideration. Any one of these 16 elements indicates a much higher land tax base than economists commonly recognize today. Taken together they are overwhelming, and cast an entirely new light on this subject.

Details

International Journal of Social Economics, vol. 36 no. 4
Type: Research Article
ISSN: 0306-8293

Keywords

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