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The purpose of this research is to review the response of professionals involved in the letting and management of industrial buildings to the implementation of Part IIA of the Environmental Protection Act, 1990 which, has imposed a regime of “strict liability”, in terms of contamination, has implications for the owners, occupiers and managers of such properties and may be affecting rental and capital values of industrial premises. This research explores the current awareness of all parties to these changes.

The study reported in this paper examines current practices in the UK and identifies areas where changes may be required, or be desirable, in order to arrive at recommendations as to “best practice”. The work was undertaken in three phases, a questionnaire survey involving leasing and managing agents, real estate owners, lawyers and bankers; a consultation stage with representative organisations including the Royal Institution of Chartered Surveyors (RICS), the Environment Agency, British Property Federation, British Bankers Association, British Insurance Association, the Law Society and the Confederation of British Industry (CBI) and interviews with a representative sample of persons from the survey. This paper reports on the questionnaire survey phase.

The research identifies considerable variation in how professionals are responding to current environmental legislation. Many seem to leave “environmental” matters to the lawyers, or to rely on standard lease terms. The paper suggests areas for improving best practice.

The research was primarily concerned with aspects of lease management rather than with valuation but it has identified the need for further research in areas such as rent determination and assignment pricing.

The research has identified areas of practice in need of review by professionals in this field from which conclusions as to “best practice” have been drawn.

The continued globalisation of investment has led to revisions in various regulatory systems and to the development of internationally applicable standards and codes of practice. As a significant asset of many businesses, real estate values are a key element of the financial detail included in annual reports. Accordingly, valuation standards have evolved to align with the requirements of accounting and banking sectors. The international demand for standardised regulatory systems and processes has many benefits and it is of critical importance for valuers not only to be fully aware of the changes in the various influencing regulatory systems but to recognise their changed responsibilities, particularly if third parties are likely to rely upon their valuations.

The potential application of data mining techniques in the extraction of information from property data sets is discussed. Particular interest is focused upon neural networks in the valuation of residential property with an evaluation of their ability to predict. Model testing infers a wide variation in the range of outputs with best results for stratified market subsets, using postal code as a locational delimiter. The paper questions whether predicted outcomes are within the range of valuation acceptability and examines issues relating to potential biasing and repeatability of results.

The increasing complexity of investment properties has necessitated the application of more advanced valuation and analysis techniques. Following the property cycle of the 1980s/1990s, and the recommendations of several reporters, the DCF method has been promoted in Australia for certain income‐producing properties. The Australian Property Institute disseminated an information paper in 1993 that discussed DCF and suggested a performance approach to its application. Following this, a practice standard was produced in 1996 that was highly prescriptive but which contained a number of confusing passages. With the benefit of hindsight, its publication was premature and it was withdrawn from circulation. A rewrite was commissioned and an exposure draft was circulated in early 1999. It has been prepared as a performance standard in which the valuer is called on to follow a method while disclosing the specifics. However, a number of considerations remain to be finalised, for example, the application of the term cash flow to net operating income, income after finance and income after finance and tax. The preparation of standards is an evolutionary process and the present coverage of the DCF practice standard reflects the market in which it applies.

Part 1 of this paper, published in the last issue of Property Management provided an overview of the research project currently being undertaken at the Polytechnic of Wales investigating the suitability of expert systems for the valuation of vacant possession residential properties for mortgage purposes. This paper will address some of the practical difficulties which developers of expert systems can expect to encounter, and offer a possible solution to the thorny problem of ‘domain appraisal’; ie, the investigation of a particular application to discover whether an expert system might be feasible.

Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though estimating the cost of flexibility is straightforward, assessing the economic value of flexibility is not. The purpose of this study is to explore the potential practical application of real option analysis to determine the economic value of a switching output flexibility embedded in a residential property investment in Australia. The study involves the exploration of an optimal strategy for investment in a residential development through real option analysis and valuation of a mixed use investment.

The real option valuation model developed by McDonald and Siegel (1986) is adopted for the evaluation because the switching output flexibility is likened to a perpetual American call option with dividend payout.

Through real option analysis, the economic value of switching output flexibility of the mixed use building was determined to be higher than the initial upfront costs. Moreover, a payoff of about $4million was determined to be the value of the switching output flexibility, therefore justifying upfront investments in flexibility as an uncertainty and risk management tool.

This application is an important demonstration of the practical use of options pricing techniques (real options analysis) and delivers further evidence needed to support the adoption of real option valuation in practice. Flexibility can also enhance risks and uncertainty management in residential property investment better than the adjustment of discount rates.

There is limited evidence on the use of real options techniques for the valuation of switching output flexibility in practice, and this comes as an original application; both the case study and data are all initial applications of switching flexibility in the Australian property market.

Real option valuation is capable of accounting for uncertainties in residential development projects but still lacks practical adoption due to limited evidence to support application of the theory in practice. The purpose of this paper is to use option valuation to value staging option embedded in residential projects and compare with results from DCF to determine which of the two methods delivers superior results.

The fuzzy payoff method (FPOM), a real options model that uses scenario planning approach to generate a range of figures, from which a single-numerical value is computed for decision-making.

The results showed that the use of a range of figures was able to represent uncertainties to a higher degree of accuracy than the static DCF. As a result, the FPOM was able to capture about 3 per cent of the value of the project that was missed by the DCF. The staging option offers an opportunity to abandon unprofitable phases of a project, thereby limiting downside losses. Thus, real option models are practically applicable to cases in property sector.

Residential property developers must consider flexibility in financial feasibility evaluation of development because of the embedded value in uncertain property projects. It is important to account for optionality in financial evaluation of property projects for value maximisation.

The FPOM has been used for the first time to evaluate a horizontal phasing of a residential development project.

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.

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.

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.

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

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

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.

The purpose of the research is to develop a conceptual framework to anticipate the vulnerability of value of commercial properties towards changing risk of flooding. The existing patterns, themes, and issues associated with property value and their vulnerability towards flooding were identified and used to inform the development of the conceptual model.

Literature review is performed to identify the factors affecting vulnerability of commercial property values to the impact of flood risk in the UK. The review approach was based on related literature contributing to identified themes and sub-themes. The extant literature is summarized into two distinct themes of “vulnerability” and “value” contributing to changing risk of flooding. The synthesised literature is then utilized in developing the conceptual map which further paved the way towards designing the conceptual framework.

The generic conceptual framework presented explores the interaction between different internal and external influencing factors affecting the vulnerability of value of commercial property system. The framework highlighted the importance of space and time within the system. An extensive review of previous studies in both the residential and commercial sectors for different disaster studies reveals that the main research challenge in assessing the vulnerability of property values are the intensive data requirements. The need for data is considered to be the main restrictive factor resulting in lack of empirical studies in this field.

This study brings together two existing research domains of flood vulnerability and property value. Practitioners and researchers will find this study useful in developing an improved understanding of the vulnerability of commercial properties to flooding. The conceptual framework is an important outcome of the research which will encourage further research in this considerably neglected field.