Property Market Cycle, Commercial Properties and Mortgage Lending Value

Property valuation of income-producing properties is normally referred to as a direct relationship between value and income. This is normally defined as income approach. The valuation process may become unclear because of the upturn and downturn in the market. This problem has been addressed in the last International Valuation Standards introducing the definition of cyclical asset to calculate the exit value (IVS, 2020; IVS 105 para 50.21 lett e). In this paragraph, the calculation of terminal value is specified “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 tough levels of cash flows in perpetuity”. This paragraph excludes the application of all the most important current methodologies based on income approach. The problem raised for the determination of terminal value may be extended, generally speaking to income-producing properties. The chapter proposes an application of a valuation methodology previously introduced (d’Amato, Int J Strategic Property Manag 19(3):207–219, 2015; Cyclical capitalization. In Lorenz D, Dent P, Kauko T (eds) Value in a changing built environment. Wiley, 2017a; J Eur Real Estate Res 10(2):211–238, 2017b) defined cyclical capitalization as a method to estimate mortgage lending value for income-producing properties. The proposed model creates a bridge between the valuation process and the property market cycle for mortgage lending valuation. Cyclical capitalization is introduced together with a different approach to mortgage lending value. Although it is widely accepted the cyclical behaviour (Roulac et al. J Real Estate Portfolio Manag 2(1):1–17, 1996; J Real Estate Res, 1999; Pyhrr et al. Analyzing real estate asset performance during periods of market disequilibrium under cyclical economic conditions: a framework for analysis. In Kapplin SD, Schwartz Jr AL (eds) Research in real estate, vol 3, pp 75–106. JAI Press, 1990) of the property market in general and the commercial property market in particular, professional practice in property valuation still relies on capitalization of either a constant or a constant growing rent. This would be a serious problem particularly in the recessive period of the market (De Lisle and Grissom, J Property Invest Finance 29(4/5):384–427, 2011). Beside theoretical discussion and empirical evidence in the literature, consequence of the Covid-19 period also demonstrates that a constant market rent and hence mortgage lending value assumption are also misleading in practice.