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Lease Terms, Option Pricing and the Financial Characteristics of Property

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  • Adams, A.T.
  • Booth, P.M.
  • MacGregor, B.D.

Abstract

Traditional and standard discounted cash flow valuation techniques are unable to deal with a variety of options contained in lease contracts. In the United Kingdom the most important embedded option is the upward-only rent review. This becomes more valuable to the landlord in an era of low demand and low inflation, as nominal market rents are more likely to fall. Lease contracts are freely negotiated between landlord and tenant, and alternative forms of rent review clause would fundamentally change the investment characteristics of property. Many other less common options also exist in lease contracts and these create further valuation difficulties. It is essential that property valuation techniques be developed that explicitly value the options in lease contracts.

Suggested Citation

  • Adams, A.T. & Booth, P.M. & MacGregor, B.D., 2003. "Lease Terms, Option Pricing and the Financial Characteristics of Property," British Actuarial Journal, Cambridge University Press, vol. 9(3), pages 619-635, August.
    • Handle: RePEc:cup:bracjl:v:9:y:2003:i:03:p:619-635_00
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    Cited by:

    1. Chien-Ming Huang & Ta-Cheng Chang, 2022. "The Valuation of Contract Deposit and Purchase Price," Mathematics, MDPI, vol. 10(23), pages 1-17, November.

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