IDEAS home Printed from https://ideas.repec.org/a/taf/jpropr/v18y2001i1p69-83.html
   My bibliography  Save this article

The application of financial theory to the pricing of upward-only rent reviews

Author

Listed:
  • Philip Booth
  • Duncan Walsh

Abstract

Traditional and discounted cash flow (DCF) methods of property appraisal do not deal adequately with the option nature of upward-only rent reviews. DCF techniques typically value the higher of the expected market level of rents after future rent reviews and the current rent. However, the expected level of income after a review is higher than either of these quantities because, assuming no voids, the distribution of rents is truncated at the current rent until the lease comes to an end. This feature exhibits the same financial characteristics as a fixed-income security with a call option to exchange the fixed income for the market rent if that is higher. An option pricing approach is developed for pricing this option and then an adjusted DCF method is developed. The option-pricing approach is an improvement on those previously published in the literature because it does not need to make the unrealistic assumption of perfect hedging. The DCF approach requires the input of a risk discount rate, and the option pricing approach requires a parameter which has to be estimated from other investment market data.

Suggested Citation

  • Philip Booth & Duncan Walsh, 2001. "The application of financial theory to the pricing of upward-only rent reviews," Journal of Property Research, Taylor & Francis Journals, vol. 18(1), pages 69-83.
    • Handle: RePEc:taf:jpropr:v:18:y:2001:i:1:p:69-83
    DOI: 10.1080/09599910010014147
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09599910010014147
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09599910010014147?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fang Fang & Lu Ruichang, 2009. "Is There a Term Structure? Empirical Evidence from Shanghai Office Rental Market," International Real Estate Review, Global Social Science Institute, vol. 12(1), pages 23-38.
    2. Jenny Jing Wang & Jianfu Shen & Frederik Pretorius, 2023. "Valuing options to renew at future market value: the case of commercial property leases," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-35, December.
    3. Booth, Philip & Walsh, Duncan, 2001. "An option pricing approach to valuing upward only rent review properties with multiple reviews," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 151-171, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:jpropr:v:18:y:2001:i:1:p:69-83. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RJPR20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.