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1 – 10 of over 9000The purpose of this paper is to provide an integrated approach that combines the two methods usually used in the real estate appraisals, namely, the income capitalisation method…
Abstract
Purpose
The purpose of this paper is to provide an integrated approach that combines the two methods usually used in the real estate appraisals, namely, the income capitalisation method and the hedonic model.
Design/methodology/approach
In order to pull out the link between the income capitalisation approach and the hedonic model, the standard hedonic price function is introduced into the basic model of income capitalisation instead of the house market value. It follows that, from the partial derivative, a direct relation between hedonic prices and discount rate can be obtained. Finally, by using the close relationship between income capitalisation and direct capitalisation, a mathematical relation between hedonic prices and capitalisation rate is also obtained.
Findings
The developed method allows to estimate the capitalisation rate using only hedonic prices. Indeed, selling and hedonic prices incorporate all of the information required to correctly estimate the capitalisation rate. Furthermore, given the close relation among going-in and going-out capitalisation rates and discount rate, the proposed method could also be useful for determining both the going-out capitalisation rate and the discount rate.
Practical implications
Obviously, it is always preferable to estimate the capitalisation rate by just using comparable transactional data. Nevertheless, the method developed in this paper is especially useful when: the rental income data are missing and/or not entirely reliable; the data on rental income and house price are related to different homes; the capitalisation rate, in fact, should compare the rent and value of identical homes. In these cases, therefore, the method can be a valuable alternative to direct estimation.
Originality/value
The large and important literature on real estate economics and real estate appraisal neglects the relationship between hedonic prices and capitalisation rate, thus considering the hedonic model and the income capitalisation approach as two separate and alternative methods. This paper, instead, shows that integration is possible and relatively simple.
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Maurizio d'Amato, Malgorzata Renigier Bilozor and Giampiero Bambagioni
Ordinary direct capitalization is normally considered procyclical in its present form (De Lisle Grissom, 2011); for this reason, an alternative approach to direct capitalization…
Abstract
Purpose
Ordinary direct capitalization is normally considered procyclical in its present form (De Lisle Grissom, 2011); for this reason, an alternative approach to direct capitalization may be useful in the determination of a robust opinion of value. The valuation standards propose an alternative determination of terminal value in the discounted cash flow analysis, recommending that for cyclical assets, the terminal value should consider … “the cyclical nature of the asset and should not be performed in a way that assumes “peak” or “trough” levels of cash flows in perpetuity” (IVS 105 Valuation Approaches and Methods para 50.21 lett e).
Design/methodology/approach
The introduction in International Valuation Standards (IVS) of Cyclical Assets raises several questions for the community of real estate professionals and academicians (IVS, 2022, 105 Valuation Approaches and Methods para 50.09 lett d). Cyclical assets can be defined as property whose value is “influenced by upturn and downturn of the market in a significant way” (d’Amato et al., 2019).
Findings
The paper proposes different solutions to the problem. The determination of the exit value using cyclical capitalization allows for a prudent assessment of the value and may be used either as a valuation procedure or a risk analysis method.
Research limitations/implications
The valuation comparison with the traditional valuation techniques will be based on an iteration of exit value in order to determine the effects of the valuation procedure on the opinion of value.
Practical implications
The implication of the valuation procedure is the introduction of a countercyclical valuation method to determine the exit value in order to reach stable and reliable valuations for income-producing properties.
Social implications
These models may have a social implication, providing valuation for income-producing properties that may deal with the property market cycle in a more efficient way, providing efficient valuation for banks and institutions.
Originality/value
The paper is the first application of such a valuation procedure to the determination of exit value.
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Maurizio d'Amato, Nikolaj Siniak and Giulia Mastrodonato
The purpose of this study is providing a possible methodological solution to the valuation of cyclical.assets. International Valuation Standards introduce a brand new definition…
Abstract
Purpose
The purpose of this study is providing a possible methodological solution to the valuation of cyclical.assets. International Valuation Standards introduce a brand new definition of property: the cyclical asset (International Valuation Standards Council 2017, IVS 105, p. 39 and p. 41). Among different property valuation methods, normally this kind of properties is appraised using income approach. In this group of methodology, the opinion of value is based on a proportional relationship between property value and rent. In the past years, a group of methods called cyclical capitalization has been proposed (d’Amato, 2003; d’Amato, 2013;d’Amato, 2015; d’Amato, 2017a; d’Amato 2017 b; d’Amato, 2017c). This method proposes an integration between property valuation and property market cycle.
Design/methodology/approach
Cyclical capitalization method is applied using a time series of property market rent of offices in prime location in the South Bank area in London. It consists of the determination of more than one all-risk yield to reproduce the property market cycle.
Findings
A comparison between the cyclical capitalization and two traditional capitalization rate shows how the proposed model is able to provide a stable opinion of value.
Research limitations/implications
The method may represent a contribution for the determination of the value of cyclical assets or for the mortgage lending value.
Practical implications
This paper provides the possibility to have a property valuation method less sensitive to upturn and downturn of the property market.
Social implications
The valuation based on cyclical capitalization are less sensitive to the upturn and the downturn of the market.
Originality/value
It is one of the first scientific paper addressing the problem of the determination of the value of cyclical assets.
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The purpose of the article is to discuss how the demand for disclosure regarding property valuation in financial reports can be fulfilled.
Abstract
Purpose
The purpose of the article is to discuss how the demand for disclosure regarding property valuation in financial reports can be fulfilled.
Design/methodology/approach
The starting point is the generally established methods for property valuation and the different types of data that they need. From this it is deduced what kind of information that it is necessary to supply.
Findings
An important conclusion from the research reported in this paper is that disclosure regarding applied methods, significant assumptions in property valuations and statements about the connections between appraised values and market evidence needs refinement in financial reports, according to International Financial Reporting Standards (IFRS). As the uncertainty in property valuations cannot be removed, it has to be managed. Providing explicit disclosure about valuations is one important way to manage this issue by reducing the gap of information asymmetry between those who perform valuations and those who are users of financial statements.
Practical implications
Providing high quality disclosure on these issues would make analysis and the application of individual judgement by users of financial reports far easier. Findings reported in this paper imply that many companies have not so far found the right balance between cost and benefits regarding what amount of disclosure would be appropriate on this issue in financial reports.
Originality/value
The detailed discussion about what information that should be disclosed concerning property valuation is an original contribution of the paper.
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Turnover rents have become an accepted part of the retail property market, particularly in managed shopping centres, airports, motorway service stations and railway stations…
Abstract
Turnover rents have become an accepted part of the retail property market, particularly in managed shopping centres, airports, motorway service stations and railway stations. Relates to their use for managed shopping centres. Their relative merits have been a source of debate among retailers and property professionals. However, the issue of valuation methodology for retail properties let on turnover leases has not been discussed. Examines the types of turnover lease in the UK and their investment characteristics. The limitations and problems of current valuation approaches are explored. The property market where retail turnover leases are most common ‐ the USA ‐ is also examined in order to assess whether any lessons can be learned. Concludes that turnover leases in the UK are likely to produce complex and varying income flows. Moreover, the usefulness of current valuation techniques will be limited, owing to a lack of comparables and the inherent inflexibility of the techniques themselves.
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An acute need exists for a practical quantitative risk management‐based real estate investment underwriting methodology that clearly helps guide decision making and addresses the…
Abstract
Purpose
An acute need exists for a practical quantitative risk management‐based real estate investment underwriting methodology that clearly helps guide decision making and addresses the shortcomings of discounted cash flow (DCF) modeling by evaluating the full range of probable outcomes. This paper seeks to address this issue.
Design/methodology/approach
The simulation‐based excess return model (SERM) is an original methodology developed based on an application of Monte Carlo simulation to project risk assessment combined with the widely practiced DCF modeling. A case study is provided where results of the modeling are compared with traditional DCF risk models and with prior projects with known outcomes.
Findings
This paper lays out a practical method for stochastic quantitative risk management modeling for real estate development projects and illustrates that for identical projects risk‐adjusted returns derived with the use of SERM may differ significantly from returns provided by traditional discounted cash flow analysis. SERM corrects serious shortcomings in the DCF methodology by incorporating stochastic tools for the measurement of the universe of outcomes. It further serves to condense the results of Monte Carlo simulations into a simplified metric that can guide practitioners and which is easily communicational to decision makers for making project funding decisions.
Practical implications
SERM offers a simple, practical decision‐making method for underwriting projects that addresses the limitations of the prevailing methodologies via: stochastic assessment of the range of outcomes; interdependence of input variables; and objective risk premium metrics.
Originality/value
This paper presents an original methodology for making project‐funding decisions for real estate development projects that is based on Monte Carlo simulation combined with DCF analysis. The methodology presented here will have value for real estate developers, investors, project underwriters, and lenders looking for a practical and objective method for project valuation and risk management than is offered by traditional DCF analysis. A review of literature did not reveal analogous methodologies for risk management.
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The purpose of this paper is to present valuation, economic, and corporate management aspects related to the design and implementation of intangible asset valuation in common…
Abstract
Purpose
The purpose of this paper is to present valuation, economic, and corporate management aspects related to the design and implementation of intangible asset valuation in common business language.
Design/methodology/approach
The methodology or approach to identifying or naming intangible assets within the business environment was used.
Findings
The purpose of intangible asset valuation is to understand what the intangible asset is and how it affects the bottom line of the business. Understanding the reason for the intangible asset valuation, whether for tax purposes, corporate planning, or dispute resolution, is paramount when considering the nature of the intangible asset to be valued.
Originality/value
Intangible assets are generally not included in active company management. Many companies do not recognize or investigate ways to maximize the income to be derived from intangible assets or other benefits of a centralized intangible asset management program. Fundamental to valuing intangible assets are their identification and subsequent representation. As presented in this paper, the three categories of intelligence identify intangible assets by the business value drivers that comprise them.
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This paper aims to propose a new valuation method for income producing properties. The model originally called cyclical dividend discount models (d’Amato, 2003) has been recently…
Abstract
Purpose
This paper aims to propose a new valuation method for income producing properties. The model originally called cyclical dividend discount models (d’Amato, 2003) has been recently proposed as a family of income approach methodologies called cyclical capitalization (d’Amato, 2013; d’Amato, 2015; d’Amato, 2017).
Design/methodology/approach
The proposed methodology tries to integrate real estate market cycle analysis and forecast inside the valuation process allowing the appraiser to deal with real estate market phases analysis and their consequence in the local real estate market.
Findings
The findings consist in the creation of a methodology proposed for market value and in particular for mortgage lending determination, as the model may have the capability to reach prudent opinion of value in all the real estate market phase.
Research limitations/implications
Research limitation consists mainly in a limited number of sample of time series of rent and in the forecast of more than a cap rate or yield rate even if it is quite commonly accepted the cyclical nature of the real estate market.
Practical implications
The implication of the proposed methodology is a modified approach to direct capitalization finding more flexible approaches to appraise income producing properties sensitive to the upturn and downturn of the real estate market.
Social implications
The model proposed can be considered useful for the valuation process of those property affected by the property market cycle, both in the mortgage lending and market value determination.
Originality/value
These methodologies try to integrate in the appraisal process the role of property market cycles. Cyclical capitalization modelling includes in the traditional dividend discount model more than one g-factor to plot property market cycle dealing with the future in a different way. It must be stressed the countercyclical nature of the cyclical capitalization that may be helpful in the determination of mortgage lending value. This is a very important characteristic of such models.
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