Lease Terms, Option Pricing and the Financial Characteristics of Property

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 an...

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Bibliographic Details
Published in:British Actuarial Journal 2003-08, Vol.9 (3), p.619-635
Main Authors: Adams, A.T., Booth, P.M., MacGregor, B.D.
Format: Article
Language:English
Subjects:
Discounted cash flow
Economic rent
Financial investments
Landlords
Lease options
Leases
Options contracts
Real estate appraisal
Rental industry
Sessional meetings: papers and abstracts of discussions
Tenants
Valuation
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Summary: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.
ISSN:1357-3217
2044-0456
1748-5002
DOI:10.1017/S1357321700004293