AN INVESTIGATION INTO THE PRICING OF PROPERTY ACCORDING TO LEASE LENGTH
||Long, Mark; Peter A. Hayes
||AN INVESTIGATION INTO THE PRICING OF PROPERTY ACCORDING TO LEASE LENGTH
||7th European Real Estate Society Conference (14-16 June 2000) Bordeaux, France
||The longevity of the income stream of a property will have impact upon the value of that investment. The UK market is dominated by the upward only lease review, as a result the underlying income stream from property investments has similar characteristics to that of a income strip of a corporate bond. However, the majority of the value of a property investment often resides in its income stream and the anticipated growth of that income. At the end of the lease the tenant of the property has the right to renew the lease on similar terms as before, or can choose to relinquish their rights of occupation, at which time the investor must either re-let or redevelop the property. As a result of this the end of a lease term can represent a significant risk to the investor in terms of both loss of income and value on the asset. This risk should be reflected in the pricing of property so that properties with shorter terms to lease expiry should be less valuable than those with longer terms to expiry. Using cross-sectional IPD annual data for 1999 this paper tests the hypothesis that there is a functional relationship between equivalents yields and the length of term to expiry of a lease for an homogeneous group of prime standard shop properties. Whilst the initial analysis also attempted to incorporate the term structure of money market interest rates, all the analyses conducted found that this factor was not a statistically significant factor in determining equivalent yields.
Post discussion ...
||D5 _ Valuation and Pricing
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