“Cyclical assets” and cyclical capitalization

Abstract

Purpose The purpose of this study is providing a possible methodological solution to the valuation of cyclical.assets. International Valuation Standards introduce a brand new definition of property: the cyclical asset (International Valuation Standards Council 2017, IVS 105, p. 39 and p. 41). Among different property valuation methods, normally this kind of properties is appraised using income approach. In this group of methodology, the opinion of value is based on a proportional relationship between property value and rent. In the past years, a group of methods called cyclical capitalization has been proposed (d’Amato, 2003; d’Amato, 2013;d’Amato, 2015; d’Amato, 2017a; d’Amato 2017 b; d’Amato, 2017c). This method proposes an integration between property valuation and property market cycle. Design/methodology/approach Cyclical capitalization method is applied using a time series of property market rent of offices in prime location in the South Bank area in London. It consists of the determination of more than one all-risk yield to reproduce the property market cycle. Findings A comparison between the cyclical capitalization and two traditional capitalization rate shows how the proposed model is able to provide a stable opinion of value. Research limitations/implications The method may represent a contribution for the determination of the value of cyclical assets or for the mortgage lending value. Practical implications This paper provides the possibility to have a property valuation method less sensitive to upturn and downturn of the property market. Social implications The valuation based on cyclical capitalization are less sensitive to the upturn and the downturn of the market. Originality/value It is one of the first scientific paper addressing the problem of the determination of the value of cyclical assets.

Cyclical capitalization: basic models

“…Subsequently, it was highlighted that the values deriving from cyclical capitalization can be characterized by a tendential prudence (d 'Amato, 2015). This peculiarity would suggest the possibility of using cyclical capitalization models in for the valuation of mortgage lending value of commercial properties (d 'Amato et al, 2019). The model can include in the valuation also vacancy lag (d 'Amato, 2017b).…”

The Transactional Asset Pricing Approach(TAPA): Incorporation of Leverage and Derivation of Extended Ellwood Formula with Fixed Leverage Benefits

“…1, 2021 the continuing evolution of the income approach to property valuation. In particular, explicit incorporation of the cyclical nature of the real estate market into property valuation models is deemed to be a hot-button issue (Kucharska-Stasiak, 2019;d'Amato, et al 2019). The authors hereof had outlined a general-purpose Transactional Asset pricing approach (TAPA), which allows for the cyclical nature of the real estate markets to be explicitly accounted for via the use of time-variable discount rates in the DCF valuation process, in a number of their preceding publications including with REMV and JPIF (Michaletz, et al, 2007;Michaletz & Artemenkov, 2018;Michaletz &Artemenkov, 2019).…”