The Transactional Asset Pricing Approach: Property Valuation Implications and a Potential for Fundamental Value Research

The chapter reviews the Transactional Asset Pricing Approach (TAPA) developed through the contributions of Michaletz (2005), Michaletz et al. (Income approach and discount rates for valuing income-producing illiquid assets – Outlines of new framework: Revisiting the concepts in income approach and developing the model of illiquid assets transactional pricing. ICFAI Journal of Applied Finance; Proceedings of the ICFAI University and the University of Philadelphia V International Conference on Business and Finance, Hyderabad (India), 2006. Available at SSRN: https://ssrn.com/abstract=996016 , 2007), Galasyuk (2018), Michaletz and Artemenkov (Real Estate Manag Valuat 26(1): 89–107. https://doi.org/10.2478/remav-2018-0008 ; https://www.degruyter.com/downloadpdf/j/remav.2018.26.issue-1/remav-2018-0008/remav-2018-0008.pdf , 2018; J Prop Invest Financ 37(3):255–288. https://doi.org/10.1108/JPIF-10-2018-0078 , 2019) for the field of professional valuation and specifically addresses its property valuation context providing an example of its application to valuing a particular property and then revaluing a property portfolio to reveal TAPA fundamental value aspects. In section “The TAPA principle of transactional equity-in-exchange and the notion of investment benchmark” we outline a mathematical formulation for the “transaction equilibrium”/“fair exchange” principle (as applied to values-in-exchange situations), which is now essentially covered by the equitable value basis of valuation under the International Valuation Standards (IVS) 2020 edition (IVSC 2020). This principle is more than two millennia old and originates in the works of Aristotle (Book V of his “Ethics”). The social and economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasyuk 2018; Artemenkov, Professional valuation as a field within economic measurements: Its bases of valuation and other international standardization challenges. Available at SSRN: https://ssrn.com/abstract=3040955 , 2017; Artemenkov et al., Int J Critic Account 10(6): 427–446, 2018). In section “TAPA discount rate theory with single- and multi-period formulations” we describe the logic and mechanism of the multi-period discount rate analysis under the TAPA framework and provide rate of return/discount rate forecasting models for the multi-period analysis context. Section “TAPA DCF: Derivation of TAPA’s Basic Pricing Equation (BPE) and its reductions to some conventional income capitalization formats” presents the derivation of the TAPA Basic Pricing Equation along with its original reductions to a number of well-known income capitalization models, such as the direct income capitalization (DIC), Gordon, Inwood, and Hoskold, used in the actual property valuation practice. Section “An example of property valuation under TAPA’s basic pricing equation” contains an example of applying the TAPA Basic Pricing Equation (BPE) to value a notional property against a valuation benchmark, and section “Fundamental value properties of TAPA’s BPE as suggested by a portfolio-level analysis” contains an example applying TAPA’s BPE to a portfolio context, thereby highlighting some fundamental value aspects of the TAPA approach.