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Journal ArticleDOI

The Initial Yield Revealed: Explicit Valuations and the Future of Property Investment

01 Apr 1992-Journal of Property Valuation and Investment (MCB UP Ltd)-Vol. 10, Iss: 4, pp 709-726
TL;DR: In this article, the basic principles of property investment are discussed and an explicit valuation procedure which can be used at any level ranging from a single property to the aggregate market may be constructed.
Abstract: Starts from the basic principles of property investment and shows that the initial yield conceals estimates of a risk premium, expected income growth and expected depreciation. Suggests that an explicit valuation procedure which can be used at any level ranging from a single property to the aggregate market may be constructed. Concludes that the surveying profession is under threat from those able to meet the growing demand for such explicit analyses.
Citations
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Journal ArticleDOI
TL;DR: In this article, the authors discuss ways in which uncertainty can be incorporated into the discounted cash flow (DCF) valuation model to determine the single point valuation figure, which is done by recognising that the input variables are uncertain and will have a probability distribution pertaining to each of them.
Abstract: Purpose – Valuation is the process of estimating price. The methods used to determine value attempt to model the thought processes of the market and thus estimate price by reference to observed historic data. This information is utilised in the discounted cash flow (DCF) valuation model to determine the single point valuation figure. However, the valuation will be affected by uncertainties: uncertainty in the comparable data available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the estimate of price. This paper discusses ways in which uncertainty can be incorporated into the DCF model.Design/methodology/approach – This paper looks at the way in which uncertainty can be incorporated into the explicit DCF model. This is done by recognising that the input variables are uncertain and will have a probability distribution pertaining to each of them. T...

103 citations

Journal ArticleDOI
TL;DR: In this paper, the authors use modern portfolio theory (MPT) to calculate the optimal allocation to property in a multi-asset portfolio and suggest optimal theoretical allocations for property which are much higher than actual allocations to property.
Abstract: Summary Studies which use modern portfolio theory (MPT) to calculate the optimal allocation to property in a multi‐asset portfolio are fundamentally flawed. These suggest optimal theoretical allocations for property which are much higher than actual allocations to property. Criticism can be made of: the exclusion of other eligible assets from the analysis; the use of a mean‐variance optimization technique on estimated data; the inadequacies of the historical data which understates risk and correlation and may overstate return; the changing characteristics of property as an investment; the indivisibility of property and the consequent difficulties in achieving a diversified property portfolio; the complexity of risk as a concept compared to the simple and simplistic definition used in MPT; and the omission of explicit consideration of differential liquidity. An alternative which offers a more practicable framework for decision‐making is a combination of econometric techniques to forecast income under diffe...

93 citations

Posted Content
TL;DR: In this article, the authors investigated the short term inflation hedging characteristics of U.K. real estate compared to other U.S. investments, including stocks, bonds, appraisal-based real estate, and real estate stocks.
Abstract: This study investigates the short term inflation hedging characteristics of U.K. real estate compared to other U.K. investments. It considers not only total returns but also changes in income and changes in capital values. The analyses are undertaken using annual and quarterly data. Stocks, bonds, appraisal-based real estate (including the three property types separately) and real estate stocks are considered. Real estate series, constructed from the original appraisal series to take account of autocorrelation, are also used. The methodology is based on that devised by Fama and Schwert (1977) and tests are undertaken for stationarity and for structural breaks. Hypotheses are established about the coefficients on expected and unexpected inflation in the model and these are tested. It is concluded that real estate has poorer short term hedging characteristics for total return, change in capital value and change in income than stocks but better characteristics than bonds. However, there is evidence to suggest that the relationships change under different economic environments.

59 citations


Cites background from "The Initial Yield Revealed: Explici..."

  • ...The capitalization rate comprises a number of components and can be approximated ( Baum and MacGregor, 1992 ) as...

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Journal ArticleDOI
TL;DR: In this paper, the authors investigated the short-term inflation-hedging characteristics of U.K. real estate compared to other U.S. investments and concluded that real estate has poorer shortterm hedging characteristics for total return, change in capital value, and change in income than stocks but better characteristics than bonds.
Abstract: This study investigates the short-term inflation-hedging characteristics of U.K. real estate compared to other U.K. investments. It considers not only total returns but also changes in income and changes in capital values. The analyses are undertaken using annual and quarterly data. Stocks, bonds, appraisal-based real estate (including the three property types, separately), and real estate stocks are considered. Real estate series, constructed from the original appraisal series to take account of autocorrelation, also are used. The methodology is based on that devised by Fama and Schwert (1977) and tests are undertaken for stationarity and structural breaks. Hypotheses are established about the coefficients on expected and unexpected inflation in the model, and these are tested. It is concluded that real estate has poorer short-term hedging characteristics for total return, change in capital value, and change in income than stocks but better characteristics than bonds. However, there is evidence to suggest that the relationships change under different economic environments.

53 citations

Journal ArticleDOI
TL;DR: In this paper, the authors address the issues raised and develop and extend the organizations of the original paper, in particular: definitions of certain concepts; the determination of value; the need for explicit valuations; price formation in the property market; and the influence of valuation on price.
Abstract: Responds to “A note on ‘The initial yield revealed: explicit valuations and the future of property investment’” published in an earlier issue of the Journal of Property Valuation & Investment. Addresses issues raised and develops and extends the organizations of the original paper, in particular: definitions of certain concepts; the determination of value; the need for explicit valuations; price formation in the property market; and the influence of valuation on price. Reiterates the purposes of the original worked example of valuations; produces a corrected version; and in an appendix presents extended solutions and a fuller discussion of the central issues.

50 citations

References
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Book
11 May 2013

2,923 citations

Book
01 Jan 1991
TL;DR: In this article, the authors discuss the importance of present value, the effect of risk on present value principal issues diversification and portfolio theory the development of capital market theory the capital asset pricing model relaxing the assumptions tests of the property pricing model property and the market portfolio portfolio portfolio expansion and revision criticisms of risk return measures used in property investment analysis.
Abstract: Part 1 Decision making under certainty and uncertainty: the importance of present value the effect of risk on present value principal issues diversification and portfolio theory the development of capital market theory the capital asset pricing model relaxing the assumptions tests of the capital asset pricing model property and the market portfolio portfolio expansion and revision criticisms of risk return measures used in property investment analysis. Part 2 Efficiency and its effect on pricing: the importance of information in assessing value efficiency of the market capitalizing on information valuation models a general approach to valuation simplifying the model alternative valuation models the equivalent yield model the equated yield model the rational valuation model reconciliation. Part 3 Hedging against inflation: development of inflation the theory defining a hedge against inflation assessing expected inflation UK and US studies on inflation hedging. Part 4 Portfolio construction: background simple statistics methodology empirical tests using value-weighted portfolios investment in all sectors portfolio diversification systematic risk of existing portfolios. Part 5 Portfolio strategy and asset allocation: portfolio strategy technical analysis fundamental analysis active/passive strategies tracking an index with a property portfolio consistent and inconsistent strategies tracking expectations property selection processing information asset allocation and sector allocation. Part 6 Performance measurement: the valuation process valuations versus prices and versus valuations valuations whim communication, accountability and research objectives of a performance measurement system measuring returns money-weighted and time-weighted rates of return calculating time-weighted rates of return the linked internal rate of return the mean fund concept choosing a bench-mark analysing the results.

155 citations

Book
01 Dec 1995
TL;DR: In this article, the authors provide a valuable critique of conventional valuation methods and argue for the adoption of more contemporary cash-flow methods, and explain how such valuation models are constructed and give useful examples throughout.
Abstract: This book explains the process of property investment appraisal – estimating both the most likely selling price (market value) and the worth of property investments to individual or groups of investors (investment value). Valuations are important: they are used as a surrogate for transactions in the construction of investment performance and they influence investors and other market operators when transacting property. Valuations need to be trusted by their clients and valuers therefore need to produce rational and objective solutions. In a style that makes the theory as well as the practice of valuation accessible to students and practitioners, the authors provide a valuable critique of conventional valuation methods and argue for the adoption of more contemporary cash-flow methods. They explain how such valuation models are constructed and give useful examples throughout. The UK property investment market has been through periods of both boom and bust since the first edition of this text was produced in 1988 and the book includes examples generated by the different market states: for example, complex reversions, over-rented situations and leasehold examples are in ready supply and are examined fully by the authors. They have retained the book’s basic structure and thrust, setting out fundamental investment and appraisal theory in Part One of the book, but adding a new chapter on building and modelling cash flows as a precursor to the investment material in Part Three. The heart of the book remains the critical examination of market valuation models addressed in Part Two – it remains the case that no other book addresses this issue in detail.

134 citations

Book
01 Jun 1991
TL;DR: In this article, the authors propose a depreciation sensitive model for the analysis of property investment, which is based on a new variable called depreciation and obsolescence (DVS) variable.
Abstract: Part 1 Context: property investment analysis in context cash flow models for property investment analysis depreciation - a new variable a classification of property investment depreciation and obsolescence. Part 2 Analysis: methodology and data an analysis of property investment depreciation and obsolescence - city offices an analysis of property investment depreciation and obsolescence - industrials. Part 3 Models and conclusions: a depreciation-sensitive model for the analysis of property investment.

101 citations

Book
06 Dec 1984

99 citations